MEMORANDUM
BLAKE, District Judge.
Multiple motions to dismiss are pending in these consolidated securities fraud actions transferred here by the Judicial Panel on Multidistrict Litigation. The claims arise out of an approximately $ 1.1 billion restatement of earnings, together with a $24.8 billion reduction in revenue, announced in 2003 by Royal Ahold N.V. ("Royal Ahold"), a Netherlands company heavily involved in the supermarket and food service business in the United States.
Preliminarily, I will state a summary of my rulings on the various motions.
The Fed.R.Civ.P.12(b)(2) motions to dismiss for lack of personal jurisdiction submitted by foreign individual defendants Fahlin, Boonstra and de Ruiter will be granted. The motions to dismiss for lack of personal jurisdiction submitted by foreign individual defendants Van der Hoeven, Meurs, and Andreae will be denied.
The Fed.R.Civ.P. 12(b)(1) motions submitted by all defendants to dismiss the claims of foreign purchasers of Royal Ahold shares on foreign exchanges for lack of subject matter jurisdiction will be denied.
The global underwriter defendants' Fed.R.Civ.P. 12(b)(1) motion to dismiss the § 11 and § 12(a)(2) claims for lack of subject matter jurisdiction will be granted.
The Fed.R.Civ.P. 12(b)(6) motions submitted by all defendants to dismiss all allegations concerning conduct that pre-dates July 30, 1999 as barred by the statute of limitations will be granted.
The Fed.R.Civ.P. 12(b)(6) motions to dismiss the § 10(b) and Rule 10b-5 claims submitted by defendants Tobin, Grize, Resnick, Deloitte & Touche LLP ("Deloitte U.S."), Deloitte & Touche Accountants ("Deloitte Netherlands"), Ahold USA and Ahold USA Holdings will be granted. The motions to dismiss the § 10(b) and Rule 10b-5 claims submitted by defendants Kaiser, Lee, Andreae, and Meurs will be denied. Van der Hoeven's motion to dismiss the § 10(b) and Rule 10b-5(b) claims will be denied; his motion to dismiss the § 10(b) and Rule 10b-5(a) and (c) claims will be granted. Miller's motion to dismiss the § 10(b) and Rule 10b-5(b) claims will be granted, but his motion to dismiss the Rule 10b-5(a) and (c) claims will be denied.
The Deloitte & Touche LLP ("Deloitte U.S.") Fed.R.Civ.P. 11 motion to strike certain allegations will be granted.
The Royal Ahold defendants' (along with individual defendants Van der Hoeven and Meurs) Fed.R.Civ.P. 12(f) motion to strike all allegations concerning misconduct at Ahold USA subsidiaries Tops and Giant-Carlisle and allegations concerning the realization of synergies and the integration of acquisitions will be denied; their motion to strike all allegations concerning accounting irregularities with the Argentine subsidiary Disco will be granted.
The Fed.R.Civ.P. 12(b)(6) motions to dismiss the § 11 and § 12(a)(2) claims submitted by Royal Ahold, the lead underwriters, the Deloitte defendants, and the individual defendants will be granted. The plaintiffs are granted 60 days to seek leave to amend the § 12(a)(2) claims.
The Fed.R.Civ.P. 12(b)(6) motions to dismiss the control person liability claims under § 20(a) submitted by defendants Miller, Resnick, Kaiser, Van der Hoeven, Meurs, Andreae, Tobin and Grize will be denied. Lee's motion to dismiss the § 20(a) claim will be granted. All motions to dismiss the § 15 claims will be granted; the plaintiffs are granted 60 days to seek leave to amend the § 15 claims.
I. Background
A. Factual History
B. Prior and Related Proceedings
C. The Parties
1. The Plaintiffs
2. The Corporate Defendants
3. The Auditors
4. The Lead Underwriters and Global Underwriters
5. The Foreign Individual Defendants
6. The Domestic Individual Defendants
II. Discussion
A. Standard of Review
B. Personal Jurisdiction
1. Cees Van der Hoeven, Michiel Meurs, Jan Andreae
2. Roland Fahlin
3. Cor Boonstra
4. Henny de Ruiter
C. Subject Matter Jurisdiction
1. Foreign Purchasers of Royal Ahold Securities on Foreign Exchanges
2. The Global Underwriters ("Dutch Banks")
D. Statute of Limitations
E. Section 10(b) and Rule 10b-5 Claims
1. Cees Van der Hoeven and Michiel Meurs
2. Jan G. Andreae
3. Mark Kaiser and Timothy J. Lee
4. James L. Miller
5. Michael Resnick
6. Robert G. Tobin
7. William J. Grize
8. The Deloitte Defendants
9. Ahold USA
10. Ahold USA Holdings
F. Royal Ahold Defendants' Motions to Strike
1. Disco
2. Tops and Giant-Carlisle
3. Statements Concerning Royal Ahold's Integration of its Acquisitions
G. Section 11 and Section 12
H. Control Person Liability Under Section 20(a) and Section 15
III. Conclusion
On February 24, 2003 Royal Ahold announced that it was restating its reported earnings by $ 500 million for fiscal years 2001 and 2002 due to a series of accounting inaccuracies related to promotional allowances at its U.S. Foodservice, Inc. ("USF") division. (See Compl. ¶ 184.)
Regulators in the United States and Europe have launched civil and criminal investigations of individuals and entities associated with Royal Ahold. Among the agencies conducting such investigations are: the United States Department of Justice, the United States Attorney's Office for the Southern District of New York, the Securities and Exchange Commission ("SEC"), the NYSE, the National Association of Securities Dealers, the Office of the Dutch Public Prosecutor, the Euronext Amsterdam Exchange, and the Dutch Authority for Financial Markets. (¶¶ 209-228.) Investigations by these entities as well as Royal Ahold have revealed that the accounting discrepancies stemmed mainly from two company practices: (1) inflated reporting of income from vendor rebates or promotional allowances; and (2) improper attribution of revenue (or "consolidation" of revenue) by Royal Ahold from joint ventures in which Royal Ahold did not have a controlling stake. The promotional allowances problem arose primarily from Royal Ahold's Maryland based USF. Promotional allowances, also known as vendor rebates, are payments made by manufacturers to retailers to encourage them to promote their products to consumers. Royal Ahold determined that USF prematurely recognized promotional allowance income in violation of U.S. and Dutch generally accepted accounting principles ("GAAP").
On May 16, 2003 Royal Ahold announced that it would reduce its revenue totals for the last two years by the sum of $ 24.8 billion dollars to properly reflect proportionate consolidation of its joint ventures, ICA, JMR, Bompreco, Paiz Ahold, and DAIH. (¶ 248.) Previously, Royal Ahold had fully consolidated these joint ventures even though it did not control them; this practice did not comport with U.S. and Dutch GAAP. (¶ 249.) After an investigation, the company determined that so-called "control letters" purporting to grant Royal Ahold decision-making authority over the ICA, Bompreco, DAIH and Paiz Ahold joint ventures, thereby providing a basis to fully consolidate the joint ventures'
The plaintiffs contend that Royal Ahold's improper consolidation of its joint ventures and allegedly fraudulent accounting of promotional allowance income enabled the company to maintain artificially inflated revenues and strong credit ratings. (¶ 23.) They allege that Royal Ahold senior executives repeatedly misled investors regarding the company's financial strength in press releases, with comments such as the one made by CEO Cees Van der Hoeven in a June 7, 2001 press release: "Once again our operating companies generated excellent results in the first quarter. In the United States, both our food retail and foodservice activities boosted earnings substantially." (¶ 579.) According to the plaintiffs, Royal Ahold's apparent financial strength supported favorable market reviews from Wall Street analysts and kept Royal Ahold stock trading at relatively high prices. This in turn enabled the company to raise capital on domestic and foreign stock exchanges in order to fund a series of ambitious acquisitions aimed at expanding the company's global reach. For example, Royal Ahold executed the September 2001 Global Offering, the offering on which plaintiffs base their § 11 and § 12(a)(2) claims, in order to fund its acquisition of Bruno's Supermarkets and USF's acquisition of Alliant Foodservice, Inc. (¶ 595.) During the claimed class period, March 10, 1998 to February 24, 2003, Royal Ahold and its subsidiaries spent billions of dollars acquiring over fifty food retail and service operations in the United States, Europe, Central and South America, and Asia Pacific. (¶¶ 131-180.) The plaintiffs allege that Royal Ahold and the individual defendants misled investors by repeatedly overstating earnings and claiming that Royal Ahold was successfully integrating its numerous acquisitions, when in reality several of the individual defendants knew there were problems with USF's internal controls and later the company admitted that it failed to manage adequately the integration of its many acquisitions. (See, e.g., ¶ 594.) The shareholder plaintiffs now bring suit to recover financial losses they claim are directly attributable to the allegedly false and misleading statements made by Royal Ahold and the associated defendants during the claimed class period.
On June 18, 2003, the Judicial Panel on Multidistrict Litigation transferred twenty-one class action securities and ERISA actions to the District of Maryland. Since then, additional related actions also have been transferred here. On November 4, 2003, I entered an order consolidating the pending securities actions and appointing COPERA and Generic as lead plaintiffs. See In re Royal Ahold N.V. Securities and ERISA Litigation, 219 F.R.D. 343 (D.Md.2003). In parallel proceedings, the SEC filed enforcement actions in the United States District Court for the District of Columbia against Royal Ahold and individual defendants Cees Van der Hoeven, Michiel Meurs, Roland Fahlin, and Jan Andreae; some of these parties have since settled with the SEC. In addition, the United States Attorney's Office filed charges in United States District Court for the Southern District of New York against individual defendants Michael Resnick,
On February 18, 2004, the lead plaintiffs filed a 430 page Consolidated Amended Securities Class Action Complaint ("Complaint").
Each of the defendants filed motions to dismiss and motions to strike the various charges asserted against them. While the individual motions differ, all defendants move to dismiss claims asserted by foreign purchasers of Royal Ahold shares for lack of subject matter jurisdiction, as well as all claims predicated on conduct prior to July 30, 1999, as barred by the statute of limitations. After the issues were fully briefed, oral argument was heard on September 23, 2004. This Memorandum and Order grants in part and denies in part the motions to dismiss and motions to strike filed by the various defendants.
1. The Plaintiffs
Plaintiffs are members of a class of persons, including both U.S. and European citizens, who purchased or acquired the common shares or American Depository Shares ("ADSs" also known as American Depository Receipts or "ADRs") of Royal Ahold, N.V. ("Royal Ahold" or the "Company") between March 10, 1998 and February 24, 2003 (the claimed "Class Period"). lead plaintiff COPERA (Public Employees' Retirement Association of Colorado) purchased Royal Ahold common shares on foreign exchanges during the class period and claims losses of more than $ 16 million (¶ 55), and lead plaintiff Generic Trading of Philadelphia, LLC ("Generic"), a large institutional trading firm, purchased Royal Ahold ADRs on the NYSE and claims losses of more than $ 1.1 million. (¶ 56.)
Royal Ahold N.V. ("Royal Ahold") is a supermarket and foodservice company incorporated under the laws of the Netherlands. Through its subsidiaries, Ahold USA, Ahold USA Holdings, and U.S. Foodservice, Inc. ("USF"), Royal Ahold operates a number of chain grocery stores and food services in the United States. Royal Ahold ADRs trade on the NYSE and its common stock trades on the Euronext exchanges of Paris, Brussels, and Amsterdam. Royal Ahold also has a secondary listing on the Swiss Exchange in Zurich. Royal Ahold and USF do not challenge the plaintiffs' § 10(b) and Rule 10b-5 claims, but Ahold USA and Ahold USA Holdings move to dismiss the § 10(b) and Rule 10b-5 claims for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). Royal Ahold moves to dismiss the § 11 and § 12(a)(2) claims and moves to strike allegations pertaining to its subsidiaries Tops and Giant-Carlisle, and its Argentine subsidiary Disco, as well as statements in the complaint regarding the integration of company acquisitions and synergies.
3. The Auditors
Deloitte & Touche LLP ("Deloitte U.S.") and Deloitte & Touche Accountants ("Deloitte Netherlands") served as the auditors for Royal Ahold and USF. The Deloitte defendants move to dismiss the plaintiffs' § 10(b), Rule 10b-5, § 11, and § 12(a)(2) claims.
4. The Lead Underwriters and the Global Underwriters ("Dutch Banks")
Lead underwriters ABN AMRO Rothschild, Goldman Sachs International, and Merrill Lynch International provided commercial and investment banking services to Royal Ahold and served as underwriters for the September 2001 Global Offering. The global underwriters ("Dutch Banks") ING Bank N.V., Rabo Securities N.V., and Kempen & Co. N.V. acted as underwriters for Royal Ahold during the class period and for the September 2001 Global Offering. The underwriter defendants move to dismiss the plaintiffs' § 11 and § 12(a)(2) claims.
5. The Foreign Individual Defendants
Cees Van der Hoeven served as Royal Ahold's Chief Executive Officer from 1993 until February 24, 2003. Michiel Meurs served as Royal Ahold's Executive Vice President and Chief Financial Officer from 1997 until February 24, 2003. Henny de Ruiter was Chairman of Royal Ahold's Supervisory Board from 1994 until 2003. Cor Boonstra served as a member of Royal Ahold's Supervisory Board from 2000 until September 3, 2001. Roland Fahlin was a member of Royal Ahold's Supervisory Board from 2001 until June 2, 2004. Jan G. Andreae was a member of Royal Ahold's Executive Board from 1997 until February 20, 2004. Each of the foreign individual defendants moves to dismiss the claims for lack of personal jurisdiction and for failure to state a claim.
6. The Domestic Individual Defendants
James L. Miller founded USF in 1989. He served as Chief Executive Officer of USF from 1994, and Chairman of the Board of Directors and President of USF from 1997, until May 13, 2003. Miller joined Royal Ahold's Executive Board on or about September 1, 2001. Mark Kaiser served in a variety of senior sales positions at USF since 1989. He served as the Executive Vice President of Sales, Marketing and Procurement at USF from 1993 until May 9, 2003. Timothy J. Lee served as a purchasing executive for USF and worked closely with Mark Kaiser until he
"The purpose of a Rule 12(b)(6) motion is to test the sufficiency of a complaint; importantly, a Rule 12(b)(6) motion does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir.1999) (internal quotation marks and alterations omitted). When ruling on such a motion, the court must "accept the well-pled allegations of the complaint as true," and "construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiff." Ibarra v. United States, 120 F.3d 472, 474 (4th Cir.1997). Consequently, a motion to dismiss under Rule 12(b)(6) may be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see also Edwards, 178 F.3d at 244. Securities fraud claims are subject to the heightened pleading requirements of Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4(b)(1)(B), (b)(2) which are discussed in more detail below. See infra Part II(E).
In addition, because the court is testing the legal sufficiency of the claims, the court is not bound by the plaintiffs' legal conclusions. See, e.g., Young v. City of Mount Ranier, 238 F.3d 567, 577 (4th Cir.2001) (noting that the "presence... of a few conclusory legal terms does not insulate a complaint from dismissal under Rule 12(b)(6)" when the facts alleged do not support the legal conclusions); Labram v. Havel, 43 F.3d 918, 921 (4th Cir.1995) (affirming Rule 12(b)(6) dismissal with prejudice because the plaintiff's alleged facts failed to support her conclusion that the defendant owed her a fiduciary duty at common law).
In considering a motion to dismiss a securities fraud complaint, "the Court is entitled to rely on public documents quoted by, relied upon, incorporated by reference or otherwise integral to the complaint, and such reliance does not convert such a motion into one for summary judgment." In re USEC Sec. Litig., 190 F.Supp.2d 808, 813 (D.Md.2002).
In federal securities actions, personal jurisdiction extends to the limits of the due process clause of the Fifth Amendment. There are two primary factors to consider in evaluating personal jurisdiction under the due process clause: (1) whether the defendant has sufficient minimum contacts with the United States
To satisfy the minimum contacts test, a plaintiff must demonstrate that a defendant either (1) engages in systematic or continuous activities in the United States (general jurisdiction) or (2) purposefully directs his actions at the United States and the litigation arises from or is related to those actions (specific jurisdiction). Essentially, it is a question of fairness: if the defendant can "reasonably anticipate being haled into court there," In re CINAR Corp. Sec. Litig., 186 F.Supp.2d 279, 305 (E.D.N.Y.2002) (quoting World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980)), that court's jurisdiction comports with due process. It also must be noted that "[g]reat care and reserve should be exercised when extending our notions of personal jurisdiction into the international field." Asahi Metal Indus. Co. v. Superior Court of California, 480 U.S. 102, 115, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987) (citation omitted).
Each of the foreign individual defendants moves to dismiss the plaintiffs' claims for lack of personal jurisdiction. There is no claim of general jurisdiction over the foreign defendants, who live outside the United States and work for a foreign corporation based in the Netherlands. Rather, the question is whether this forum has specific jurisdiction. The Fourth Circuit recently stated, "[i]n determining whether specific jurisdiction exists, we consider (1) the extent to which the defendant has purposefully availed [himself] of the privilege of conducting activities in the state; (2) whether the plaintiffs' claims arise out of those activities directed at the state; and (3) whether the exercise of personal jurisdiction would be constitutionally `reasonable.'" Carefirst, 334 F.3d at 397. In interpreting these factors, many courts apply an effects test to evaluate whether a defendant's purposeful availment is sufficient and causally related to the plaintiff's alleged injuries. "This `effects test' of personal jurisdiction is typically construed to require that the plaintiff establish that: (1) the defendant committed an intentional tort; (2) the plaintiff felt the brunt of the harm in the forum, such that the forum can be said to be the focal point of the harm; and (3) the defendant expressly aimed his tortious conduct at the forum, such that the forum can be said to be the focal point of the tortious activity." Id. at 398 n. 7 (citing IMO Indus., Inc. v.
Before examining each foreign individual defendant's contacts with the United States, it must be determined whether the fiduciary shield doctrine applies. That doctrine protects individuals from personal jurisdiction in a forum where their only contacts with the forum arise from acts carried out within the scope of their employment. See Birrane v. Master Collectors Inc., 738 F.Supp. 167, 169 (D.Md.1990). The foreign individual defendants rely on the fiduciary shield doctrine to contend that this court lacks personal jurisdiction because all of the allegations against them pertain to actions taken in their corporate capacity. As the Fourth Circuit has made clear, however, "the fiduciary shield rule is solely a matter of statutory construction under state law and is not required under the due process clause." Western Contracting Corp. v. Bechtel Corp., 885 F.2d 1196, 1200 (4th Cir.1989). While a forum cannot establish personal jurisdiction over foreign defendants based solely on their status as officers in a corporation that is alleged to have committed fraud in the United States, see Columbia Briargate Co. v. First Nat. Bank in Dallas, 713 F.2d 1052, 1064-65 (4th Cir.1983), if the complaint sufficiently alleges that the defendants "had a direct personal involvement in a tort committed in the forum state," id. at 1064, then personal jurisdiction over the defendants does not conflict with the fundamental notions of fairness required by the due process clause. This analysis comports with the Supreme Court's decision in Calder v. Jones, 465 U.S. 783, 790, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984), which noted that while personal jurisdiction over an employee is not conferred simply by the corporation's contacts with a forum, "their status as employees does not somehow insulate them from jurisdiction. Each defendant's contacts with the forum State must be assessed individually." See also SEC v. Carrillo, 115 F.3d 1540, 1547 (11th Cir.1997). Accordingly, in deciding the personal jurisdiction question, I will not simply examine acts taken by a corporation and attribute them to the corporate executives, but I will consider an individual defendant's actions directed at the forum, even if those acts were done in that defendant's corporate capacity.
Consistent with this analysis, an individual's status as a control person of a corporation that has jurisdictional contacts with the United States, standing alone, is insufficient to establish personal jurisdiction. Equating "the broad understanding of control person liability adopted by the Securities Act" with personal jurisdiction "impermissibly conflates statutory liability with the Constitution's command that the exercise of personal jurisdiction must be fundamentally fair." In re Baan Co. Sec. Litig., 245 F.Supp.2d 117, 129 (D.D.C.2003); see also Tracinda Corp. v. DaimlerChrysler AG, 197 F.Supp.2d 86, 99 (D.Del.2002) (stating "[p]ersonal jurisdiction is an independent threshold consideration to the question of liability"); In re CINAR, 186 F.Supp.2d at 306 n. 18; but see McNamara v. Bre-X Minerals, 46 F.Supp.2d 628, 636 (E.D.Tex.1999) (establishing control person liability is sufficient to establish personal jurisdiction). An individual's status as a control person is a factor to be considered, however, in the jurisdictional analysis.
Applying the above principles, United States courts frequently have asserted personal jurisdiction over individual defendants who sign or, as control persons, approve the filing or disseminating of, particular forms required by the SEC which they knew or should have known would be
it is perfectly reasonable to exercise jurisdiction over [the defendant] based solely on her signing the 1999 Registration Statement ... There is no clearer example of purposeful availment of the privilege of doing business in the United States than this ... [The defendant] must have known that the statement was made to comply with the laws governing securities offerings in the American markets and, as such, it would be used and relied upon by American investors. [The defendant] could have reasonably foreseen that, were there to be litigation concerning the Statement, she would be haled to court in the United States.
186 F.Supp.2d at 305-06. See also Itoba Ltd. v. LEP Group PLC, 930 F.Supp. 36, 41 (D.Conn.1996) (holding that personal jurisdiction existed over a foreign defendant who approved forms knowing they would be filed with the SEC and relied on by investors in the U.S.); Derensis v. Coopers & Lybrand, 930 F.Supp. 1003, 1014 (D.N.J.1996); Landry v. Price Waterhouse, 715 F.Supp. 98, 101 (S.D.N.Y.1989).
1. Cees Van der Hoeven, Michiel Meurs, and Jan Andreae
The complaint alleges that defendants Van der Hoeven, Meurs, and Andreae signed false and misleading documents on behalf of Royal Ahold that were filed with the SEC. (See, e.g., ¶¶ 73, 77, 104, 534, 636, 688.) By signing SEC filings, these three individuals directed their actions at the United States and could reasonably anticipate being haled into court here. In addition, the required nexus between the defendants' contacts and the plaintiffs' injuries exists because "the plaintiffs' claims arise out of those activities directed at the [United States].'" Carefirst of Md., Inc., 334 F.3d at 397. Therefore, based on the numerous SEC filings they signed, this court finds that Van der Hoeven, Meurs, and Andreae have sufficient minimum contacts with the United States.
Even though Van der Hoeven, Meurs and Andreae have sufficient minimum contacts with the United States, the court must determine whether the exercise of jurisdiction over these individuals is reasonable, Lesnick, 35 F.3d at 942, and must use particular caution before extending "personal jurisdiction into the international field." Asahi Metal, 480 U.S. at 115, 107 S.Ct. 1026. The Fourth Circuit has explained that:" `The unique burdens placed upon one who must defend oneself in a foreign legal system should have significant weight in assessing the reasonableness of stretching the long arm of personal jurisdiction over national borders'.... But, `[w]hen minimum contacts have been established, often the interests of the plaintiff and the forum in the exercise of jurisdiction will justify even the serious burdens placed on the alien defendant.'" Base Metal Trading, Ltd. v. OJSC Novokuznetsky Aluminum Factory, 283 F.3d 208, 214 (4th Cir.2002) (quoting Asahi Metal, 480 U.S. at 114, 107 S.Ct. 1026). The weaker the contacts, however, the less likely it is that jurisdiction is reasonable.
The plaintiffs argue that jurisdiction over the foreign individuals is reasonable because "(1) it imposes only a slight burden on the Defendants; (2) the Lead Plaintiffs and the United States have a substantial interest in keeping the litigation in the United States; (3) it is necessary for the efficient administration of justice; and (4) public policy demands it." (See Pls.' Opp'n to Foreign Defs.' Motions to Dismiss at 64.) To further support their claim of reasonableness, the plaintiffs note that the burden on the foreign defendants in litigating in the U.S. is slight when compared to the harm allegedly suffered by the class. The plaintiffs also argue that the court must afford the plaintiffs' choice of forum some degree of deference, Ticketmaster-New York, 26 F.3d at 211, and that the U.S. is the most efficient place to litigate the dispute: the wrong occurred here, most of the plaintiff class resides in the U.S., most of the evidence and witnesses are here, U.S. law governs, and it would avoid piecemeal litigation. In response, the defendants argue that jurisdiction here is unreasonable because the burden on the defendants from litigating in the U.S. is high, the proceedings may conflict with ongoing investigations and actions in the Netherlands, and due to joint and several liability among all defendants, the plaintiffs' ability to recover will not be affected by the absence of the foreign defendants.
Even with modern advances in communications and travel, the foreign defendants are correct that the burden for them of defending litigation in the United States is significant. In this case, however, "`the interests of the plaintiff and the forum in the exercise of jurisdiction will justify even the serious burdens placed on the alien defendant[s],'" Base Metal Trading, 283 F.3d at 214 (quoting Asahi Metal, 480 U.S. at 114, 107 S.Ct. 1026), because the burden on the defendants is outweighed by the interests of the United States and the plaintiffs in resolving the dispute in American courts. While courts in the Netherlands have a strong interest in preventing fraud in the Netherlands, the United States has a similar interest in preventing fraud here, in protecting the integrity of its stock markets, in promoting investor confidence, and in providing relief under federal statutes to those harmed by securities fraud. In In re CINAR, 186 F.Supp.2d at 305, the court held that the exercise of personal jurisdiction over a foreign individual was reasonable "based solely on her signing the 1999 Registration Statement." Likewise, in Carrillo, 115 F.3d at 1547, the court held that jurisdiction over two foreign individuals was reasonable because "[t]he record shows that [they] were primary participants in the alleged contacts with the United States." Similarly, by signing SEC filings, Van der Hoeven, Meurs, and Andreae were primary participants in Royal Ahold's contacts with the United States. While Royal Ahold is domiciled in the Netherlands, it has become "a primarily United States based company with 74% of its sales generated in the United States." (¶ 57.) Consequently, in light of the defendants' contacts with the U.S., the alleged harm that resulted to investors in the U.S., and the interests of the U.S. in enforcing its securities laws to protect investors, this court can reasonably and legitimately exercise jurisdiction over Van der Hoeven, Meurs, and Andreae. The plaintiffs' claims are causally related to the defendants' purposeful
2. Roland Fahlin
The complaint alleges that Fahlin signed the December 29, 2000 Registration Statement. (¶¶ 103, 833.) An examination of the actual document filed with the SEC on December 29, 2000, however, demonstrates that this allegation is not correct.
The most significant allegations concerning Fahlin relate to his involvement in May 2000 as a signatory on a "control" letter and a contradictory "side" letter concerning Royal Ahold's joint venture with ICA. (¶¶ 264, 339, see infra Part II(E)(1) and (8), which discuss the side letters in greater detail.) These letters, sent by a foreign employee of a foreign corporation to another foreign corporation, lack a direct connection to the U.S. The control/side letter scheme did have an impact in the U.S. because it allowed Royal Ahold to artificially inflate the revenue included in its financial statements, which were incorporated into Royal Ahold's SEC filings and relied upon by American investors. Unlike Andreae, however, Fahlin signed no SEC filings. Despite the fact that Fahlin's acts ultimately had an impact in the U.S., the U.S. cannot be fairly characterized as the focal point of either Fahlin's acts or the harm suffered because his allegedly fraudulent acts were directed towards the Netherlands, and globally, but not specifically towards the U.S. See Carefirst of Maryland, 334 F.3d at 398 n. 7 (stating that specific jurisdiction over a foreign defendant is "typically construed to require that ... the plaintiff felt the brunt of the harm in the forum, such that the forum can be said to be the focal point of the harm; and the defendant expressly aimed his tortious conduct at the forum, such that the forum can be said to be the focal point of the tortious activity") (citing IMO Indus., Inc. v. Kiekert AG, 155 F.3d 254, 265-66 (3rd Cir.1998)). As a result, Fahlin lacks sufficient minimum contacts with the United States for this court to exercise specific jurisdiction over him.
3. Cor Boonstra
The complaint fails to allege that Boonstra had any "direct personal involvement" in acts directed at the United States; instead it attempts to establish minimum contacts by relying on conclusory allegations and Boonstra's status on the Royal Ahold Supervisory Board. While the complaint states that Boonstra was a "direct and substantial participant in the fraud," it does not offer any specific factual allegations to support this claim. (¶ 81.) The plaintiffs include Boonstra in their broad group pleadings and allege that he acted as a control person, but they fail to note a single specific act taken by Boonstra directed at the U.S. (¶ 824.) Consequently, this court lacks personal jurisdiction over defendant Boonstra and must dismiss all claims against him.
4. Henny de Ruiter
As with Boonstra, the plaintiffs allege that de Ruiter was a "direct and
Plaintiffs have the burden of proving that subject matter jurisdiction exists. See Evans v. B.F. Perkins, Co., 166 F.3d 642, 647 (4th Cir.1999). In reviewing a Fed.R.Civ.P. 12(b)(1) motion, "the district court is to regard the pleadings' allegations as mere evidence on the issue, and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment." Richmond, Fredericksburg & Potomac R. Co. v. United States, 945 F.2d 765, 768 (4th Cir.1991). A court should grant a Rule 12(b)(1) motion "if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law." Evans v. B.F. Perkins Co., 166 F.3d at 647. When the jurisdictional facts are intertwined with questions of law, however, it may be appropriate to resolve the entire factual dispute at a later proceeding on the merits. See United States v. North Carolina, 180 F.3d 574, 580-581 (4th Cir.1999); Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir.1982); Bryant v. Clevelands, Inc., 193 F.R.D. 486, 488 (E.D.Va.2000).
The Royal Ahold defendants and the individual defendants seek to dismiss all claims asserted by foreign class members who purchased Royal Ahold shares on foreign exchanges for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1). The Global Underwriter or Dutch Bank defendants contend that their involvement as underwriters in the September 2001 Global Offering did not involve any conduct or activity in the United States or with United States parties and therefore there is no basis for this court to exercise subject matter jurisdiction over the plaintiffs' § 11 and § 12 claims asserted against them.
The Securities Act of 1933 and the Securities Exchange Act of 1934 are silent as to whether they apply extraterritorially, and Congress has provided little guidance on the issue. See, e.g., Zoelsch v. Arthur Andersen & Co., 824 F.2d 27, 30 (D.C.Cir.1987) ("If the text of the 1934 Act is relatively barren, even more so is the legislative history. Fifty years ago, Congress did not consider how far American courts should have jurisdiction to decide cases involving predominately foreign securities transactions with some link to the United States. The web of international connections
Under the "conduct" and "effects" tests, in order for courts to exercise subject matter jurisdiction over foreign transactions, the defendant's allegedly fraudulent conduct that contributed to the securities violation must have occurred within the United States or its overseas conduct must have caused a substantial adverse effect in the U.S. market. See, e.g., Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 665 (7th Cir.1998). The Fourth Circuit has not yet adopted a conduct or effects framework in the context of the extraterritorial application of the securities laws.
The defendants urge the court to exercise judicial restraint and decline to apply the conduct and effects tests adopted by other courts, but not yet recognized by the Fourth Circuit. While the Supreme Court has not commented on the conduct and effects test in the securities law arena, it recently ruled that under the antitrust laws, federal courts lack subject matter jurisdiction over foreign plaintiffs' claims that are based solely on the foreign effect of the defendant's conduct and independent from any domestic effect caused by the defendant's conduct. See F. Hoffman-La Roche Ltd. v. Empagran S.A., ___ U.S. ___, ___, 124 S.Ct. 2359, 2363, 159 L.Ed.2d 226 (2004). The defendants further argue that the Hoffman-La Roche decision should be read to preclude subject matter jurisdiction in cases such as this, where foreign purchasers of securities on foreign exchanges seek a remedy under the U.S. securities laws. While the Hoffman-La Roche case provides important guidance to federal courts about how to weigh the comity concerns implicated by the extraterritorial application of U.S. laws, I find it both legally and factually distinguishable from the present dispute. Accordingly, its holding will not be applied here to bar subject matter jurisdiction over the foreign purchasers of Royal Ahold securities.
The substantial allegations submitted by the plaintiffs concerning U.S. based securities fraud warrant scrutiny by a U.S. court, even though many of the parties to this dispute are foreign and some of the relevant conduct occurred overseas. See Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir.1972) ("[W]hen ... there has been significant conduct within the territory, a statute cannot properly be held inapplicable simply on the ground that, absent the clearest language, Congress will not be assumed to
Those courts that have applied the conduct test have formulated somewhat different standards for evaluating when foreign transactions have a sufficient nexus with the United States to justify subject matter jurisdiction by an American court. The Second, Fifth, Seventh and D.C. Circuits have applied the most stringent formulation of the conduct test. Under their standard, "a federal court has subject matter jurisdiction if (1) the defendant's activities in the United States were more than `merely preparatory' to a securities fraud conducted elsewhere, and (2) these activities or culpable failures to act within the United States `directly caused' the claimed losses." Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 122 (2d Cir.1995) (citing Bersch, 519 F.2d at 987, and Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir.1991)). Accord Robinson v. TCI/US West Communications, 117 F.3d 900, 905-06 (5th Cir.1997) (agreeing that the domestic conduct must have been of "material" importance or "directly caused" the fraud complained of); Zoelsch v. Arthur Andersen & Co., 824 F.2d 27, 31 (D.C.Cir.1987) (same). Among these circuits, the D.C. Circuit has adopted the strictest version of the conduct test, requiring that "the domestic conduct [comprise] all the elements of a defendant's conduct necessary to establish a violation of section 10(b) and Rule 10b-5: the fraudulent statements or misrepresentations must originate in the United States, must be made with scienter and in connection with the sale or purchase of securities, and must cause the harm to those who claim to be defrauded, even though the actual reliance and damages may occur elsewhere." Zoelsch, 824 F.2d at 31 (citing IIT v. Cornfeld, 619 F.2d 909, 920-921 (2d Cir.1980)).
In deciding what qualifies as "merely preparatory" conduct rather than that which is material and directly causes the complained of loss, the Second, Fifth, Seventh
The Third, Eighth, and Ninth Circuits have relaxed this standard slightly, holding that the domestic conduct must be a "significant" contributor or "material" to the fraudulent scheme. In the most relaxed version of the conduct test, the Third Circuit found jurisdiction where "at least some activity designed to further a fraudulent scheme occurs within this country." SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.1977) (emphasis added). The Eighth Circuit relied on a Second Circuit
Under the effects test, courts have subject matter jurisdiction over foreign transactions related to securities if the transactions resulted in direct, adverse injury to specific American investors and parties within the United States. See Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118, 128 (2d Cir.1998); Bersch, 519 F.2d at 989; Schoenbaum v. Firstbrook, 405 F.2d 200, 208 (2d Cir.1968). Allegations that the foreign conduct generally affected the U.S. market will not satisfy the effects test. See, e.g., Bersch, 519 F.2d at 989 ("[T]here is subject matter jurisdiction of fraudulent acts relating to securities which are committed abroad only when these result in injury to purchasers or sellers of those securities in whom the United States has an interest, not where acts simply have an adverse affect on the American economy or American investors generally.").
It is not necessary to satisfy both the conduct and the effects test in order to find subject matter jurisdiction; meeting just one test is enough. See Robinson, 117 F.3d at 905. At least two courts, however, have used a combination of both tests in order to decide whether it makes sense for an American court to hear the case. See Itoba Ltd., 54 F.3d at 122 ("an admixture or combination of the two [tests] often gives a better picture of whether there is sufficient United States involvement to justify the exercise of jurisdiction by an American court"); Kauthar SDN BHD, 149 F.3d at 665, n. 8 ("[s]ince the aim of this inquiry is to measure the degree of United States involvement in the transaction in question, the joint assessment of conduct and effects seems appropriate because it permits a more comprehensive assessment of the overall transactional situation").
Judge Lee of the Eastern District of Virginia recently adopted the so-called "middle ground" approach of the Seventh, Eighth and Ninth Circuits, rejecting the Third Circuit as "too lenient," and the D.C., Second and Fifth Circuits as "too rigid." In re Cable & Wireless, 321 F.Supp.2d 749, 762-63 (E.D.Va.2004).
I agree with Judge Lee that the Third Circuit standard is not sufficiently strict, but the D.C. Circuit standard, with its emphasis on the conduct itself constituting a securities violation, is too strict. Of the "middle ground" circuits, I believe the Seventh Circuit's standard as articulated in Kauthar SDN BHD, 149 F.3d at 667,
federal courts have jurisdiction over an alleged violation of the antifraud provisions of the securities laws when the conduct occurring in the United States directly causes the plaintiff's alleged loss in that the conduct forms a substantial part of the alleged fraud and is material to its success. This conduct must be more than merely preparatory in nature; however, we do not go so far as to require that the conduct occurring domestically must itself satisfy the elements of a securities violation.
Kauthar SDN BHD, 149 F.3d at 667 (emphasis added). The Kauthar standard will be applied to determine whether subject matter jurisdiction exists as to the claims of foreign purchasers of Royal Ahold shares on foreign exchanges and the § 11 and § 12 claims against the Global Underwriters.
1. Foreign Purchasers of Royal Ahold Securities on Foreign Exchanges
The plaintiffs argue that subject matter jurisdiction exists for the claims of foreign purchasers of Royal Ahold shares on foreign exchanges due solely to Royal Ahold's conduct within the United States, not because of any domestic effects. Specifically, plaintiffs allege and defendants have admitted in Royal Ahold's 2002 Form 20-F filed with the SEC that the accounting fraud uncovered at USF as well as Tops and Giants stores in the U.S. related to "fictitious and overstated vendor allowances and improper or premature recognition rates" for such allowances which "intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP." (¶ 3) (citing 2002 Form 20-F at 69). Approximately $885 million of the overall $1.1 billion earnings restatement made by Royal Ahold was attributable to the improper recognition of promotional
The defendants contend that such statements could not "directly cause" the foreign plaintiffs injury because they purchased Royal Ahold shares on the Euronext pursuant to corporate information ("press releases, conference calls and financial reporting") which was disseminated from the Netherlands. (See Royal Ahold Defs.' Mot. to Dismiss at 17.) As the plaintiffs point out, however, many of the allegedly false financial results and misrepresentations issued by Royal Ahold originated in the United States and were filed with the SEC. It is well recognized that "SEC filings generally are the type of `devices' that a reasonable investor would rely on in purchasing securities of the filing corporation," Itoba Ltd., 54 F.3d at 123 (holding that SEC filings that include substantial misrepresentations may establish subject matter jurisdiction).
Taken as true, as they must be at the motion to dismiss stage, the plaintiffs' allegations sufficiently demonstrate that Royal Ahold's conduct within the United States was more than "merely preparatory" to the alleged securities fraud associated with the overseas purchase of Royal Ahold shares by foreign plaintiffs. The documented accounting fraud related to the overstatement of vendor allowances by Royal Ahold's U.S. based subsidiaries substantially contributed and indeed was material to Royal Ahold's success in attracting shareholders both in the U.S. and abroad. According to the plaintiffs, Royal Ahold was able to maintain artificially inflated share prices and fund an ambitious acquisition campaign in part by improperly recognizing income from vendor allowances in its U.S. operations. When Royal Ahold made its first restatement of $500 million because of the U.S. based vendor allowance accounting fraud on February 24, 2003, the Royal Ahold share price trading on foreign exchanges lost 63% of its value, directly causing a financial injury to the foreign plaintiffs. Therefore, the plaintiffs have adequately demonstrated sufficient U.S. based conduct by the Royal Ahold defendants to justify asserting subject matter jurisdiction over the claims of foreign purchasers.
2. The Global Underwriters ("Dutch Banks")
The plaintiffs' allegations concerning the Dutch Banks' involvement in the
In fact, the record demonstrates that the Dutch Banks had a minimal role in the September 2001 Global Offering, one which was limited to the overseas placement of Royal Ahold shares with private European clients. The affidavits submitted by the Dutch Bank defendants declare that the Dutch Banks engaged in no conduct within the United States and that they did not place or sell any Royal Ahold shares with United States parties when they participated in the September 2001 Global Offering. Each Global Underwriter defendant declares that it privately placed Royal Ahold Shares only outside the United States under Regulation S, an SEC regulation that exempts shares sold outside the United States from registration. (See Global Underwriters' Mot. to Dismiss, Koning Aff., Ex. A; Hopman Aff., Ex. B; Bakker Aff., Ex. C.) The September 2001 Prospectus Supplement clearly states that "[t]he underwriters will offer our common shares outside the United States in reliance on Regulation S under the Securities Act." (July 28, 2004 Entwistle Aff., Ex. 3 at S-29.) As such, the Global Underwriters did not expect their transactions to be within the reach of the Securities Act. Stef Koning, Director of Corporate Finance for Kempen & Co. N.V., declares that his firm was invited to participate by ABN AMRO Rothschild in London via a phone call and fax from London on September 4, 2001, the night before the offering. (See Koning Aff., Ex. A., ¶ 4.) Mr. Koning declares that "[w]e were allocated fewer than 500,000 of the 80 million Royal Ahold shares, and no ADSs. We sold the allocated common shares to 16 of our European institutional clients. We were barred from any direct sales efforts to the United States. We did not have any contact with the United States either in our preparatory efforts to participate in the Global Offering or in our sales efforts." (Id. at ¶ 2.) Maarten Hopman, Managing Director for ING Bank, affirms virtually the same facts: ING Bank was invited on September 4, 2001 via
The plaintiffs do not contest the affidavits.
The court also must decide whether any of the plaintiffs' claims are time-barred under the applicable statute of limitations. Prior to enactment of the Sarbanes-Oxley Act of 2002, Pub.L. No. 107-204,116 Stat. 745, 801, codified in part at 28 U.S.C. § 1658, the Exchange Act contained a statute of limitations period which required a claimant to file suit within one year of discovery of the alleged fraud or three years from the date of the alleged fraud, whichever was earlier. See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363-64, 111 S.Ct. 2773, 115
The claimed class period in this case runs from March 10, 1998 to February 24, 2003. The plaintiffs allege numerous materially false and misleading statements by defendants during this timeframe. The question before the court is whether plaintiffs can rely on alleged statements and conduct occurring before July 30, 1999 as a basis for their § 10(b) and Rule 10b-5 claims, under the theory that the new Sarbanes-Oxley two year-five year limitations period applies retroactively.
The Royal Ahold defendants argue that any of plaintiffs' claims that are based on alleged conduct occurring before July 30, 1999, three years before the Sarbanes-Oxley Act became effective, were and are time-barred. In other words, if at the time the Sarbanes-Oxley Act became effective the plaintiffs' claims would already have been time-barred under the one year-three year framework, then such claims would still be time-barred after the effective date of the Sarbanes-Oxley Act, and not somehow revived under the new two year-five year limitations period. Therefore, plaintiffs should not be permitted to rely on any conduct that predates July 30, 1999. The plaintiffs contend that according to the plain language of § 804(b), the new statute of limitations applies to all "proceedings ... commenced on or after the date of enactment of this Act." Because the alleged fraud was brought to their attention after July 30, 2002, and their claims were filed on February 26, 2003, after the effective date of the Sarbanes-Oxley Act, the plaintiffs argue that all claims stemming from relevant conduct within the last five years should be permitted to go forward.
the court must determine whether the new statute would have retroactive effect, i.e., whether it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed. If the statute would operate retroactively, our traditional presumption teaches that it does not govern absent clear congressional intent favoring such a result.
Landgraf, 511 U.S. at 280, 114 S.Ct. 1483.
While the Supreme Court has recognized that Congress "might constitutionally provide for retroactive application of [an] extended limitations period," Int'l Union of Electrical Radio and Machine Workers, AFL-CIO v. Robbins & Myers, Inc., 429 U.S. 229, 244, 97 S.Ct. 441, 50 L.Ed.2d 427 (1976), the Court also has observed that such an expansion would affect the substantive rights of a party and therefore the presumption against retroactivity applies. Hughes Aircraft Co. v. United States, ex rel. Schumer, 520 U.S. 939, 950, 117 S.Ct. 1871, 138 L.Ed.2d 135 (1997) ("extending a statute of limitations after the pre-existing period of limitations has expired impermissibly revives a moribund cause of action.") In Hughes Aircraft, the Court approvingly cited the Ninth Circuit's reasoning in Chenault v. U.S. Postal Service, 37 F.3d 535, 539 (9th Cir.1994) that "a newly enacted statute that lengthens the applicable statute of limitations may not be applied retroactively to revive a plaintiff's claim that was otherwise barred under the old statutory scheme because to do so would alter the substantive rights of a party and increase a party's liability." 520 U.S. at 950, 117 S.Ct. 1871. See also In re Apex Exp. Corp., 190 F.3d 624, 642-643 (4th Cir.1999) (holding that a shortened statute of limitations period could not apply retroactively absent an express command from Congress); Million v. Frank, 47 F.3d 385, 390 (10th Cir.1995) (holding that reviving previously time-barred claims had an impermissible retroactive effect); FDIC v. Belli, 981 F.2d 838, 842-843 (5th Cir.1993) (same). Furthermore, statutes of repose, such as the one at issue here, have been considered substantive statutes, suggesting an even greater need for clear congressional language directing that the new
The overwhelming majority of courts that have examined § 804 of the Sarbanes-Oxley Act have held that it lacks clear language indicating that Congress intended the new two year-five year limitations period to apply retroactively to claims that were already time-barred. See, e.g., In re Enterprise Mortgage Acceptance Co., Sec. Litig., 391 F.3d 401, 405-07 (2d Cir.2004) (affirming district courts' decisions that neither the language nor the legislative history of § 804 dictated that previously stale claims be revived); In re WorldCom, Inc. Sec. Litig., Nos. 02 Civ. 3288, 03 Civ. 9499, 2004 WL 1435356, at *7 (S.D.N.Y.2004) (holding that claims based on research reports issued before July 30, 1999 were time-barred because "[t]here is no explicit language in the statute stating that it applies retroactively or that it operates to revive time-barred claims."); L-3 Communications Corp., No. 03-CV-3932, 2004 WL 1941248 at *5-6 (finding the statute's language to be ambiguous and therefore unable to "overcome the presumption against applying it to previously time-barred claims"); In re Enron Corp. Sec., Derivative & ERISA Litig., No. MDL-1446, *12, 2004 WL 405886 (S.D.Texas Feb.25, 2004) (holding that the new limitations period "does apply to subsequently filed actions based on underlying conduct that occurred before the enactment of the Sarbanes-Oxley Act as long as such claims were not time-barred by the Lampf statute of limitations and/or repose controlling before July 30, 2001" [sic]); Glaser v. Enzo Biochem, Inc., 303 F.Supp.2d 724, 734 (E.D.Va.2003) (holding that "Congress did not unambiguously provide that the two-year limitations period would apply retroactively."); In re Heritage Bond Litig., 289 F.Supp.2d 1132, 1148 (C.D.Cal.2003) (holding that plaintiffs' claims which were time-barred as of July 30, 2002, the date of enactment of the Sarbanes-Oxley Act, cannot be revived by the amended statute of limitations). But see Roberts v. Dean Witter Reynolds, Inc., No. 8:02-CV-2115-T-26EAJ, 2003 WL 1936116 (M.D.Fla.2003) (relying on the statutory language and the legislative history to conclude that the Sarbanes-Oxley Act has retroactive effect.).
I agree that Congress did not clearly indicate that the Sarbanes-Oxley Act revives previously time-barred claims. The statutory language of § 804(b) directs that the new limitations period "shall apply to all proceedings addressed by this action that are commenced on or after the date of enactment of this Act." While this language would permit claims based on conduct occurring in the months prior to the Sarbanes-Oxley Act, it does not clearly define the extent of the statute's temporal reach and it does not express Congress's unambiguous intent that the statute apply to claims that were already stale under the three year period of repose. Cf., Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 12 U.S.C. § 1821(d)(14)(C)(i) (1994) (Congress amended the Act and clearly stated "the Corporation may bring an action ... on such claim without regard to the expiration of the statute of limitations applicable under State law"). Moreover, allowing an expanded limitations period to apply retroactively would upset the defendants' substantive rights by making them defend against claims that they reasonably relied upon as being expired. In re Enterprise Mortgage, 295 F.Supp.2d 307, 315 (S.D.N.Y.2003), aff'd, 391 F.3d 401 (2d Cir.2004). See also Million, 47 F.3d at 390 (reasoning that applying a new statute of limitations period to revive previously moribund claims would affect the substantive rights of both the plaintiff and the defendant).
The individual defendants, Deloitte U.S., Deloitte Netherlands, Ahold USA, and Ahold USA Holdings have filed motions to dismiss the plaintiffs' complaint for failure to state a claim under § 10(b) and Rule 10b-5. "To state a claim under section 10(b) and Rule 10b-5, a plaintiff must allege that '(1) the defendant made a false statement or omission of material fact
To survive a motion to dismiss, Fed.R.Civ.P. 9(b) requires that plaintiffs plead all of the elements of fraud with particularity. "Particularity of pleading is required with regard to the time, place, speaker, and contents, as well as the manner in which statements are false and the specific acts raising an inference of fraud — the `who, what, where, why and when.'" In re First Union Corp. Sec. Litig., 128 F.Supp.2d 871, 884 (W.D.N.C.2001) (citing Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir.1999)). See also In re Criimi Mae Sec. Litig., 94 F.Supp.2d 652, 657 (D.Md.2000). Furthermore, the Private Securities Litigation Reform Act ("PSLRA") requires a complaint to "specify 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, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). The complaint must also "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Ottmann, 353 F.3d at 344 (quoting 15 U.S.C.A. § 78u-4(b)(2)).
The Fourth Circuit has held that scienter under the PSLRA may be alleged by "pleading not only intentional misconduct, but also recklessness," Ottmann, 353 F.3d at 344, and has defined recklessness as "an act so highly unreasonable and such an extreme departure from the standard of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Id. at 343 (quoting Phillips v. LCI Int'l, Inc., 190 F.3d at 621.) In evaluating recklessness, the Fourth Circuit applies:
a flexible, case-specific analysis ... in examining scienter pleadings .... courts should not restrict their scienter inquiry by focusing on specific categories of facts, such as those relating to motive and opportunity, but instead should examine all of the allegations in each case
Ottmann, 353 F.3d at 345-46. In sum, to survive the defendants' motions to dismiss the plaintiffs must successfully plead with particularity facts specific to each individual defendant that create a strong inference the defendant acted knowingly or recklessly in making material misrepresentations or omissions, though the plaintiffs are not required to plead motive or opportunity.
The individual defendants challenge various aspects of the complaint, including what they view as plaintiffs' reliance on impermissible "group pleading," an attempt to establish "non-speaker" aiding and abetting liability, and the plaintiffs' reliance on statements that the defendants argue are not actionable because they are either forward looking or immaterial puffery. These issues will be discussed generally before turning to the specific allegations against each defendant.
Essentially, "the group pleading presumption (sometimes known as the `group-published information' presumption) is not a prohibition on forms of pleading; rather it serves as a presumption that may be invoked in favor of a plaintiff." Dunn v. Borta, 369 F.3d 421, 434 (4th Cir.2004) (emphasis in original). Under the group published information doctrine:
corporate officers and directors who are alleged to be in day-to-day control of the company may be presumed, for pleading purposes, to be collectively responsible for a company's `group published' information such as prospectuses, registration statements, annual reports, press releases and other public filings. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir.1987). Thus, the plaintiffs need not set forth with particularity which corporate officers conveyed a misrepresentation when the misleading information is contained in group publications.
In re Criimi Mae, 94 F.Supp.2d at 657 n. 4. The plaintiffs attempt to rely on the group published information doctrine and allege that:
Defendants Van der Hoeven, Andreae, de Ruiter, Meurs, Miller, Resnick, Lee, Kaiser, Tobin, Grize and Fahlin are liable for the false statements in SEC filings and press releases as such statements represent "group-published" information, disseminated to the public as a result of the collective actions of these defendants. It is appropriate to treat these defendants as a group and to presume that the false and misleading information conveyed in the public filings, press releases and other publications, as alleged herein, are the collective actions of this narrowly defined group of defendants. By virtue of their high level positions within Ahold, defendants Van der Hoeven, Andreae, de Ruiter, Meurs, Miller, Resnick, Lee, Kaiser, Tobin, Grize and Fahlin directly participated in the management of the Company, were directly involved
(¶ 785.)
In Dunn, the Fourth Circuit noted that "[w]e have never addressed the issue of whether the group pleading presumption should be recognized in this Circuit...." 369 F.3d at 434.
Another preliminary issue is that of "non-speaker" or aiding and abetting liability. For liability to attach under Rule 10b-5(b), a defendant must make a public misrepresentation. The Supreme Court has held that such liability does not attach for aiding and abetting another's misrepresentation. Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 177, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994); Gariety v. Grant Thornton, LLP, 368 F.3d 356, 369 (4th Cir.2004). Since the Supreme Court's decision in Central Bank, the circuits have developed somewhat different tests for determining whether a nonspeaker may be held liable as a primary violator of Rule 10b-5(b).
In Gariety, the Fourth Circuit expressed its preference for the test stated by the Tenth Circuit in Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1225 (10th Cir.1996), which explained that "[t]he critical element separating primary from aiding and abetting violations is the existence of a representation, either by statement or omission, made by the defendant, that is relied upon by the plaintiff." While the alleged violator need not "directly communicate misrepresentations to plaintiffs for primary liability to attach," id. at 1226, for a "misrepresentation to be actionable as a primary violation, there must be a showing that [the defendant] knew or should have known that his representation would be
A third preliminary issue concerns protected forward looking statements and puffery. Certain statements that might otherwise be actionable are protected by the Reform Act's safe harbor provision, which protects forward looking statements from liability under Rule 10b-5(b). 15 U.S.C. § 78u-5(a)(2). The Fourth Circuit has noted that "`[p]rojections of future performance not worded as guarantees are generally not actionable under the federal securities laws,'" Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir.1993) (quoting Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th Cir.1993)), however, "we recognize that expressions of belief or opinion concerning current facts may be material." Raab, 4 F.3d at 290 (citing Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991)).
In addition to the plaintiffs' claims based on material misstatements under Rule 10b-5(b), the plaintiffs also contend that the individual defendants have violated subsections (a) and (c) of
While the individual defendants argue that the complaint impermissibly relies on group published information and lacks the required particularity, the plaintiffs contend that their complaint also "sets forth a number of specific allegations demonstrating that each of these defendants had a
1. Cees Van der Hoeven and Michiel Meurs
The complaint alleges that Van der Hoeven and Meurs (the CEO and CFO, respectively, of Royal Ahold) signed several SEC filings (¶¶ 73, 77) and made numerous public statements in press releases, analyst presentations, and conference calls that were materially false and misleading (see, e.g., Compl. Part XIII.). Specifically, the plaintiffs contend that Van der Hoeven and Meurs materially misrepresented Royal Ahold's financial strength, including the fact that its financial statements comported with U.S. and Dutch GAAP, and repeatedly omitted material facts related to the company's problems with internal controls and the integration of its many acquisitions. Relying on Royal Ahold's own admissions in its 2002 Form 20-F, as well as statements from company officials describing the results of the internal investigations, the plaintiffs have adequately alleged that many of the defendants' statements were false or materially misleading.
The critical issue with respect to Van der Hoeven and Meurs, then, is whether, and at what point in time, they made false and misleading statements with the requisite scienter. There are a number of significant factors that lead to the strong inference that both Meurs and Van der Hoeven made at least some of the misleading public statements alleged in the complaint with the requisite scienter. First, there were a number of red flags that should have alerted Van der Hoeven and Meurs to the alleged fraud at USF. One of these red flags arose when Miller informed Royal Ahold's Executive Board of the inadequate internal controls at USF on April 1, 2000. (¶¶ 15-16, 272-74.) A second red flag came from Deloitte, which warned Royal Ahold's Executive Board of USF's weak internal controls in a memo on July 24, 2000. Deloitte alerted Royal Ahold's Executive Board to "deficiencies in the design or operation of the Company's internal control that, in our judgment, could adversely affect the Company's ability to record, process, summarize, and report financial data consistent with the assertions of management in financial statements." (July 13, 2004 Entwistle Aff. Ex. 5.) While these two alone might not be sufficient, a third red flag that should have alerted Van der Hoeven and Meurs to the problems at USF arose when Smith, then the CFO for USF, warned them that USF's earnings had been manipulated by overstating allowance income. (¶¶ 4, 8, 19, 229-230.) The warnings from Smith included an April 12, 2001 memo by Smith sent directly to Meurs stating that he wished to bring certain "matters to the board of Royal Ahold," including the fact that "[t]here is a tremendous amount of pressure to book allowances with no support to make the earnings targets." (See July 13, 2004 Entwistle Aff. Ex. 8. at 2.) Smith explained that "USF is to deliver $ 592 million in corporate allowance income for the year. As of April less than $ 50 million has been billed or collected while we have recognized $ 125 million in income." (Id.) Smith opined that he was facing "open resistance" to setting up a better promotional allowance tracking system and that "there is very limited acquisition integration even though acquisitions are a corner stone for growth." (Id.)
There were two follow-up memoranda regarding Smith's departure. The first
Second, the complaint sufficiently alleges facts indicating that Meurs knew, or was reckless in not knowing, that Royal Ahold was improperly consolidating the financial results of joint ventures it did not control, specifically, ICA, DAIH, Bompreco, Paiz Ahold and JMR, and as a result, Royal Ahold was able to artificially inflate its financial statements. These improper consolidations and inflated financial statements were incorporated into SEC filings that portrayed a materially false picture of Royal Ahold's finances. The complaint alleges that on April 13, 2000, Deloitte & Touche sent a letter to Meurs and the Royal Ahold Executive Board expressing concern about consolidating the joint venture revenues unless Royal Ahold had sufficient proof of control. (¶ 337.) (See July 13, 2004 Entwistle Aff., Ex. 3.) Shortly thereafter, in May 2000, the complaint alleges Meurs drafted "two contemporaneous conflicting side letters," which were signed by Andreae and dated May 2, 2000 and May 5, 2000, respectively. (¶ 338.) The first "control letter," submitted to the Deloitte auditors stated that "although the ICA joint venture was a partnership, in the event of a dispute, Ahold's view would govern." (Id.) The second "side letter," which was concealed from the Deloitte auditors, "confirmed that ICA and Canica did not agree that Ahold had the right to impose its views in the event of a disagreement over the operations of the ICA joint venture... effectively neutralizing the initial side letter." (¶ 339.) Following the control letter drafted by Meurs and signed by Andreae, "Deloitte approved full consolidation of the financial results of the ICA joint venture with Ahold's financial results for fiscal 2000 and fiscal 2001."
A third factor that contributes to the inference of scienter stems from the positions held by Meurs, the Vice-President and CFO of Royal Ahold, and Van der Hoeven, the CEO of Royal Ahold, and the massive fraud that took place under their watch. While the size of the fraud and an individual's position, standing alone, are insufficient to create a strong inference of scienter, they are factors that may be considered in light of the totality of the circumstances. In In re MicroStrategy Inc. Sec. Litig., 115 F.Supp.2d 620, 635-637 (E.D.Va.2000), the court noted that while the "misapplication of GAAP and the acknowledged need to restate MicroStrategy's financial" would be insufficient on its own, the magnitude, pervasiveness, and repetitiveness of the violations "serves to amplify the inference of scienter to be drawn." The court reasoned that "common sense and logic dictate that the greater the magnitude of a restatement or violation of GAAP, the more likely it is that such a restatement or violation was made consciously or recklessly." Id. at 636 (citations omitted). See also In re Telxon Corp. Sec. Litig., 133 F.Supp.2d 1010, 1030 (N.D.Ohio 2000) (stating "allegations of obvious `red flags,' or warning signs that financial reports are misstated, can, where the misstatements are of a substantial magnitude, give rise to a strong inference of fraudulent intent"); Rehm v. Eagle Finance
Accordingly, when all of the factors above are considered collectively, it is clear that the allegations set forth in the complaint create a strong inference that Van der Hoeven and Meurs knew their statements were misleading or, at the very least, were reckless in not knowing.
The allegations in the complaint also are sufficient to state a claim under Rule 10b-5(a) and (c) based on Meurs's involvement in a fraudulent scheme to artificially inflate Royal Ahold's financial statements by improperly consolidating financial results from the joint ventures with ICA, DAIH, Bompreco, Paiz Ahold and JMR, which Royal Ahold did not control. As discussed above, Meurs allegedly drafted the control letter and rescinding side letter for ICA, and thereby played a significant role in enabling Royal Ahold to fraudulently inflate its revenues. Consequently, Meurs' motion to dismiss the Rule 10b-5(a) and (c) claims will be denied. The complaint does not, however, allege any facts specifically demonstrating Van der Hoeven's role in "any device, scheme or artifice to defraud," and therefore his motion to dismiss the Rule 10b-5(a) and (c) claims will be granted.
2. Jan G. Andreae
The complaint alleges that Andreae, like many of the other individual defendants, signed materially false and misleading documents filed with the SEC. (¶¶ 104, 451, 636.) Only one of these documents, the May 18, 2001 Form 6-K, may be considered.
3. Mark Kaiser and Timothy J. Lee
The complaint repeatedly alleges Kaiser's direct and substantial involvement in the fraud at USF, stating that he deliberately inflated rebate totals and created two sets of books, telling suppliers they did not need to pay as much in rebates as they had previously agreed to pay. (¶¶ 91, 212, 237-42). Officials at USF's suppliers Sara Lee and ConAgra colluded with USF officials to supply false confirmations of the vendor rebate amounts in order to perpetuate the scheme. (¶¶ 232-234.)
Unlike many of the other individual defendants, Kaiser, a marketing manager for USF, did not serve Royal Ahold in an executive capacity and was not responsible for any of Royal Ahold's or USF's press releases.
The totality of the allegations in the complaint create a strong inference that Kaiser was the original source of information he knew would be communicated to and relied upon by investors and that he knew this information was materially false. Further, even if Kaiser did not make any actionable statements under Rule 10b-5(b), he would still be subject to the Rule 10b-5(a) and (c) claims against him because the plaintiffs have alleged with particularity Kaiser's role in the fraudulent scheme to inflate the rebate totals, which led to fictitious financial statements and a falsely inflated stock price.
Similarly, the complaint alleges that Timothy Lee, a USF purchasing executive, worked closely with Kaiser to create false promotional allowance figures and to inflate USF's earnings. (¶¶ 237-242.) Lee did not submit a brief in support of his motion to dismiss the § 10(b) and Rule 10b-5 claims, electing instead to rely on the arguments set forth by his co-defendants. Consistent with my ruling concerning Kaiser, Lee may be primarily liable under § 10(b) if he created false or misleading information knowing it would be communicated to and relied upon by investors, and he may be subject to liability under Rule 10b-5(a) and (c) for his role in the scheme to artificially inflate USF's earnings. Accordingly, his motion to dismiss the § 10(b) and Rule 10b-5 claims will be denied.
4. James L. Miller
The plaintiffs fail to state a § 10(b) or Rule 10b-5(b) claim against Miller because they do not allege any false or misleading statements or omissions of material fact attributable to Miller. The plaintiffs have, however, stated a Rule 10b-5(a) and (c) claim against Miller because
The plaintiffs charge Miller with signing numerous materially false and misleading SEC documents and issuing materially false and misleading statements regarding USF and Royal Ahold's performance. The majority of the SEC documents relied on by plaintiffs, however, cannot be considered, either because they are barred by the statute of limitations or because they pre-date Royal Ahold's acquisition of USF in April 2000. See Ontario Pub. Serv. Employees Union Pension Trust Fund v. Nortel Networks Corp., 369 F.3d 27, 34 (2d Cir.2004) (stockholders do not have standing to sue under § 10(b) and Rule 10b-5 when the company whose stock they purchased is negatively affected by the material misstatement of another company, whose stock they did not purchase). The only remaining SEC document signed by Miller is the October 1, 2001 Form S-8, a registration statement for USF's 401(k) plan, which plaintiffs allege contained false and misleading financial results for Royal Ahold's fiscal years 2000 and 2001. (¶ 636.) According to Miller, however, this document only pertains to USF's 401(k) plan. Plaintiffs have not alleged they are shareholders or participants in USF's 401(k) plan or that they relied on this document when they purchased Royal Ahold securities, and therefore it will not be considered.
The remaining eight statements by Miller are taken from press releases or conference calls with analysts.
The other statements relate to USF and Royal Ahold's operations and projected sales growth strategy. Morgan Stanley Dean Witter reported that "Jim Miller, CEO of USF...Gave An Upbeat Presentation on Ahold's Foodservice Outlook on October 23, 2001...indicating a 10% minimum annual sales growth...[based on Ahold's goal] to increase higher margin street account sales." (¶ 635.) In the Third Quarter 2002 Analyst Presentation, Miller talked about narrowing the gap between USF and its competitor Sysco, stating "...I think probably next year, as we put our IT systems together, we'll have one platform across the United States. And at that point in time the metrics will match up almost identical." (¶ 697.) In the same presentation, in response to an analyst question about whether to expect more sales declines because of the restructuring and integration of Alliant, Miller stated that looking back, "[w]e probably lost $200m just because of some things that we didn't do properly..." but that "..I think as we end up this year you're going to see that our business is stabilized .... we're getting back to selling again, we're getting back to marketing ... you're going to see organic sales totally grow ... in the next two to three weeks our marketing department is going to announce several very major contracts..." (¶ 698). The plaintiffs argue in their opposition brief that these statements misled investors because Miller failed to reveal that USF was having problems with its internal controls. (See Pls.' Mem. in Opp'n to the Domestic Defs.' Motions to Dismiss at 23-24.) The comments made by Miller, however, are primarily forward-looking statements about USF's operations and projected sales numbers, and therefore are not actionable. Plaintiffs attempt to rely on statements made by Van der Hoeven and Meurs, who often participated in the same conference calls as Miller, regarding Royal Ahold's and USF's financial results, and attribute these to Miller. This pleading approach fails to satisfy the requirements of the PSLRA and Rule 9(b). Likewise, while Miller's response to the question about the integration of Alliant partially refers to past facts, the plaintiffs have failed to allege with particularity how this statement was false or misleading.
Although plaintiffs fail to allege any false or misleading statements by Miller, they have stated a claim for violations of Rule 10b-5(a) and (c) by alleging that Miller recklessly inflated USF's earnings by manipulating the promotional allowance income. As described above, USF was able to manipulate its earnings to meet its targets by booking promotional allowance income before it had been earned, by inflating the promotional allowance amounts, and by interfering with the confirmation process in order to sustain the scheme. Investigations revealed that Kaiser, described by the plaintiffs as Miller's "right-hand man," falsified many of the promotional allowance records. (¶¶ 88-91.) Kaiser worked with Miller as a senior executive in sales and procurement since at least 1989, when Miller founded USF. (¶ 88.) The close and long-standing relationship between Kaiser and Miller, and the fact that Royal Ahold has determined that USF overstated its pre-acquisition revenues by more than $97 million (¶ 17), support the plaintiffs' allegation that Miller "substantially participated in the preparation of Ahold's false financial results ... in providing USF's financial results to Ahold." (¶ 87.) See e.g., In re MicroStrategy, 115 F.Supp.2d at 636 (holding that the magnitude, pervasiveness, and repetitiveness of the accounting
The plaintiffs provide other facts supporting their allegation that Miller was a "direct and substantial participant" in the fraud. (¶ 83.) The plaintiffs quote David F. McAnally, a former CFO of a company that merged with USF in 1997, who claimed that USF was using a "smoke and mirrors approach" to booking promotional allowance income since at least 1997, and perhaps since the company was founded in 1989. (¶ 231.) According to McAnally, "Jim Miller's approach was to book [the promotional allowance income] based on a history of being able to push those volumes through the distribution cycle" and that this approach "overstat[ed] their values by an awful lot of money."
The plaintiffs also focus on statements from Royal Ahold that indicate Miller played a role in and/or recklessly disregarded the promotional allowances scheme. On May 13, 2003 the company announced Miller's resignation, stating that the decision had been made "in light of the results of the forensic accounting work ... which had identified total overstatements of pre-tax earnings of approximately USD 880 million." (¶ 244.) When asked later that day how the company had failed to detect the earnings overstatements throughout the three-year period, de Ruiter responded: "The explanation lies in the word `fraud.'" (¶ 246.) Indeed, Royal Ahold's Statement of Defense filed with the Enterprise Chamber of the Amsterdam Court of Appeals states that in response to the accounting fraud disclosure, the company had taken several measures, including the resignation of Jim Miller, and the institution of a lawsuit against Miller to recover damages in connection with the fraud committed. (See July 13, 2004 Entwistle Aff., Ex. 1 at 64.)
Finally, Miller's position as founding CEO of USF, and the fact that he reaped unusual financial awards as a result of the earnings overstatements, contribute to the strong inference that Miller participated in with knowledge of, or at least reckless
In his motion to dismiss and in his reply brief, Miller does not specifically challenge the plaintiffs' Rule 10b-5(a) and (c) claims. Instead, Miller argues that all of the plaintiffs' § 10(b) and Rule 10b-5 allegations fail to create a strong inference that he acted with scienter. In particular, Miller argues that the fact he alerted Royal Ahold executives at the time of the company's acquisition of USF that his controls for promotional allowance income were not good negates the inference of scienter. This argument is not persuasive when considered with the other facts alleged by plaintiffs demonstrating that Miller knew about or perhaps put in place the improper bookkeeping methods as early as 1989, and at least by 1997, well before the 2000 acquisition by Royal Ahold. The facts outlined above, including the allegations concerning Miller's role as CEO and his generous bonus compensation, considered together, support a strong inference that Miller participated in the deceptive and manipulative promotional allowance accounting scheme at USF with knowledge or at least reckless disregard. Accordingly, plaintiffs have stated a claim against Miller for violation Rule 10b-5(a) and (c).
5. Michael Resnick
The plaintiffs do not allege that Resnick signed any documents filed with the SEC or made any public statements which were materially false or misleading. Instead, plaintiffs attempt to state a a § 10(b) and Rule 10b-5 claim against Resnick by alleging that "[a]s CFO of USF, he knowingly or recklessly participated in the preparation of USF's and Ahold's false financials which he unquestionably knew would be disseminated to the investing public." (Pls.' Mem. in Opp'n to Domestic Defs.' Motions to Dismiss at 37) (citing ¶¶ 8, 785, 802, 808). The complaint, however, does not allege any facts that would raise a strong inference that Resnick knew or recklessly disregarded the fact that the promotional allowance numbers were false, or that he knowingly or recklessly approved the false financial data for inclusion in USF and Royal Ahold financial reports.
6. Robert G. Tobin
Viewing the allegations against Tobin in their totality demonstrates that the plaintiffs have failed to plead facts sufficient to create a strong inference of scienter and, as a result, the § 10(b) and Rule 10b-5 claims against Tobin must be dismissed. While the complaint alleges multiple false and misleading statements by Tobin, most of these are best characterized as immaterial and forward looking.
The plaintiffs argue that, as President and CEO of Ahold USA, Tobin must have known of the fraud and lack of internal controls at USF due to the pervasiveness, magnitude, duration, and scope of the scheme, especially since Miller, the president and CEO of USF, reported directly to Tobin. In addition, there were two red flags the plaintiffs believe should have alerted Tobin, as a member of Royal Ahold's Executive Board, to the control problems and fraud at USF. First, Miller notified Royal Ahold "at the time of the acquisition on April 1, 2000, that USF had `poor systems' and that the USF `systems controlling my PA is not good and needed attention.'" (¶¶ 17, 272, 274.) Second, on July 24, 2000, Deloitte & Touche sent a memo to the Royal Ahold Executive Board notifying the board that USF had weak internal controls following the recent acquisition and merger. (See July 13, 2004 Entwistle Aff., Ex. 5.) While the memo from Deloitte on July 24, 2000, like the notification from Miller, warned Royal Ahold's Executive Board that USF had weak internal controls, it also discussed the ways in which those problems were being addressed. Rather than creating a strong inference that Tobin was aware of fraud at USF, the memo leads to an inference that Tobin was aware there was a potential for fraud, but also that action was being taken to remedy the problem. These two red flags, standing alone, do not support a strong inference that by December 29, 2000, Tobin acted with fraudulent intent or recklessness when he signed the registration statement.
7. William J. Grize
With respect to Grize, the complaint fails to allege misleading statements with
8. The Deloitte Defendants
The plaintiffs allege that Deloitte & Touche LLP ("Deloitte U.S.") and Deloitte & Touche Accountants ("Deloitte Netherlands") violated § 10(b) and Rule 10b-5(a), (b) and (c) when they certified Royal Ahold's financial results without qualification for the company's statements and annual reports from 1999 through 2001. The plaintiffs allege that the Deloitte defendants knew or recklessly disregarded the fact that Royal Ahold's financial results were materially overstated and in violation of Dutch and U.S. GAAP due to the improper consolidation of joint venture revenue and inflated promotional allowances. Therefore, the plaintiffs argue, the Deloitte defendants should be held liable for all misstatements of Royal Ahold's financial results as well as false assertions that the financial statements conformed with Dutch and U.S. GAAP and GAAS.
As outlined above, the § 10(b) and Rule 10(b)-5 claims against the Deloitte defendants must meet the pleading requirements of the PSLRA. Plaintiffs attempt to satisfy the scienter requirement for the Deloitte defendants by alleging that the auditors acted recklessly in certifying Royal Ahold's financial results. In order for recklessness to provide a strong inference of scienter as defined by the PSLRA, plaintiffs must allege facts demonstrating that "the accounting practices were so deficient that the audit amounted to no audit at all or that ... no reasonable accountant would have made the same decisions if confronted with the same facts."
The plaintiffs allege that the Deloitte defendants violated the professional standards proscribed by GAAP and GAAS and recklessly disregarded numerous red flags concerning both the promotional allowances fraud and the improper joint venture consolidation. First, the plaintiffs allege that the Deloitte defendants knew about the lack of internal controls at USF as early as 2000 yet failed to subsequently modify their audit plans or qualify their opinions. In support of this allegation, the plaintiffs point out that on September 4, 2000, Royal Ahold's Audit Committee discussed the need to tighten internal controls related to promotional allowances at USF. (¶ 763.) Plaintiffs allege that the Deloitte defendants participated in the Audit Committee meetings and reviewed the Committee's minutes as part of their audit planning process. (Id.) The plaintiffs also rely on the July 24, 2000 letter from Deloitte Netherlands to the Royal Ahold Executive Board in which Deloitte reported an $11 million accounting fraud at USF's Buffalo division and a necessary $90 million restatement of vendor income by USF in its April 1, 2000 financial report. (July 13, 2004 Entwistle Aff., Ex. 5).
The plaintiffs also allege that USF CFO Ernie Smith "alerted" Deloitte about the vendor rebate fraud at USF in 2001 and that Deloitte "ignored" his warning (¶¶ 4, 19), yet this allegation is not supported by the record.
The plaintiffs allege numerous other "red flag" warnings which they contend the Deloitte defendants recklessly disregarded. First, the plaintiffs allege that the high management turnover at USF from 1997 to 2001 must have alerted the Deloitte defendants that there was a higher than normal risk for accounting improprieties. (¶ 783.) The complaint, however, does not plead particular facts to explain why the Deloitte Defendants should have concluded the high turnover was the result of fraud rather than another reason. Further, the plaintiffs allege that the Deloitte defendants ignored the increased risk that management would misstate Royal Ahold's financial results because their bonus and compensation structure was linked to earnings results and because Royal Ahold was relying on an inflated stock price to fund its acquisitions. (Id.) It is not uncommon, however, for large, publicly held companies to tie compensation to earnings results or to have aggressive growth strategies, and plaintiffs do not allege that these circumstances provided a motive for the Deloitte defendants to participate in the alleged fraud. See In re Sunterra Corp. Sec. Litig., 199 F.Supp.2d 1308, 1334 (M.D.Fla.2002) (rejecting plaintiffs' contention that a company's "aggressive growth strategy" was a sufficient "red flag" and noting that there was "no assertion that [the auditor] itself had a motive to participate in the alleged fraud").
The plaintiffs allege that the Deloitte defendants violated Dutch and U.S. GAAS provisions by failing to appropriately plan and modify audits given their awareness of internal control weaknesses at USF. (¶¶ 756-765.) They contend this alleged oversight was particularly egregious because Deloitte & Touche, as the "dominant accounting firm in the grocery and foodservice
The plaintiffs contend, however, that Deloitte U.S.'s audit confirmation process was deficient because they "knowingly and wrongfully sent these Audit Confirmation Letters to sales executives at the vendors," individuals who had a motive to misrepresent the vendor rebate amounts, rather than to accounting department personnel. (¶ 770.) In support of this allegation, the plaintiffs rely on a section within AU § 330, the GAAS provision which covers audit confirmation procedures. Yet as Deloitte U.S. point outs, this provision directs auditors to send confirmation requests "to a third party who the auditor believes is knowledgeable about the information to be confirmed. For example...[an] official who is responsible for the financial institution's relationship with the client or is knowledgeable about the transactions or arrangements." AU § 330.26. Deloitte U.S. apparently operated within their professional standards when they elected to send the confirmation letters to the sales representatives. Plaintiffs contend that the Deloitte defendants
Furthermore, the plaintiffs' complaint alleges more than once that the Deloitte defendants were deliberately deceived regarding the true status of the vendor rebates. (¶¶ 47, 204, 232.) The complaint quotes from Royal Ahold's 2002 Form 20-F which states that:
[a]s part of the fraud, certain members of USF management and other employees interfered with the audit confirmation process for vendor allowance receivables from vendors, concealed vendor contracts and their true terms, made misrepresentations regarding the absence of prepayments from vendors, and caused the creation of certain inaccurate accounting records.
(¶ 47.) The complaint also quotes from an interview with interim CFO Dudley Eustace who explained that USF executives "created false figures for promotional allowances" which were then "supported by false confirmations from people working within the suppliers' companies." (¶ 240.) These allegations conflict with the plaintiffs' assertions that the Deloitte defendants must have known about the fraud or recklessly disregarded it. Based on these inconsistencies in the complaint, it is impossible to draw a "strong inference" that the Deloitte defendants knew about or recklessly disregarded the vendor rebate fraud at USF. See In re Livent, 78 F.Supp.2d at 217-18 (holding that plaintiffs failed to establish scienter where the complaint contained allegations demonstrating that the auditor's client "went to considerable lengths to conceal the truth" from the auditors).
Additionally, the plaintiffs allege that the Deloitte defendants' extensive relationship with Royal Ahold compromised its ability to aggressively seek the truth from company management and conduct its audits with the appropriate level of independence. Specifically, the plaintiffs assert that "Deloitte had effectively abandoned its independence in connection with Ahold because of Deloitte's consulting, tax, advisory, risk management, due diligence and other non-audit work." (¶ 22.) The plaintiffs' allegations do not particularly state the extent to which the Deloitte defendants benefitted economically from any consulting or "non-audit" work, and conclusory allegations that the auditors stood to gain financially by participating in or recklessly disregarding the client company's fraud are not sufficient under the PSLRA's heightened pleading standard. See, e.g., Reiger v. Price Waterhouse Coopers LLP, 117 F.Supp.2d 1003, 1007 (S.D.Cal.2000) (stating that a "large independent accountant will rarely, if ever, have any rational economic incentive to participate in its client's fraud" because an "accountant's success depends on maintaining a reputation for honesty and integrity"); In re
The plaintiffs also allege that Deloitte U.S. was particularly compromised because it served as the internal auditor for Royal Ahold. (¶ 750.) The plaintiffs allege that "Deloitte's staff were literally `camped out' in a conference room at USF" yet they failed to correct the lack of internal controls or to "report on and correct" the promotional allowance fraud. (¶ 8.) As discussed previously, however, the plaintiffs also repeatedly acknowledge in their complaint that the Deloitte defendants reported the problem of weak internal controls at USF in "every report" to the Royal Ahold management. (¶¶ 485, 513, 535, 570, 594, 637, 664, 684, 705, 757.) The plaintiffs' conflicting allegations do not support a "strong inference" that the Deloitte defendants were somehow complicit in the alleged fraud or purposefully turned a blind eye to it. While Deloitte's repeated recognition of the internal controls problem may at best support a finding that the Deloitte defendants were negligent in handling a known audit risk, it does not suggest they were reckless or acting with fraudulent intent. See, e.g., Reiger, 117 F.Supp.2d at 1009 (stating that the auditor's failure to inquire further about the client's contract documents "may show negligence, but it does not suggest awareness of fraud.").
Similarly, the fact that Deloitte U.S. performed internal audit services for USF for several months during 2000 and 2001 does not provide sufficient basis to infer that the Deloitte defendants were aware of and recklessly disregarded the vendor rebate fraud, see In re Stone & Webster, Inc., Sec. Litig., 253 F.Supp.2d 102, 133-34 (D.Mass.2003) (holding that allegations that auditors "were regularly present at [the company's] corporate headquarters throughout the year and had continual access to and knowledge of [the company's] private and confidential corporate financial and business information," is not enough to establish scienter), particularly, where as here, the plaintiffs' complaint also alleges that the Deloitte defendants were purposely deceived by the individuals perpetrating the fraud. As to the claim that the Deloitte
Finally, the plaintiffs argue that the magnitude and pervasiveness of the fraud provides a strong inference that the Deloitte defendants must have been reckless in their audits of Royal Ahold. The vendor rebate fraud at USF resulted in Royal Ahold making an $885 million restatement. While it is true that courts have found that substantial restatements can support a strong inference of scienter on the part of the auditors, such findings are usually coupled with other compelling factors, such as the reckless disregard of red flags or evidence that the auditors had compromised their independence. See, e.g., In re MicroStrategy, 115 F.Supp.2d at 651-56 (concluding that the magnitude of the restatement and the GAAP violations, as well the auditors' disregard for red flags and failure to maintain an independent relationship, supported a strong inference of scienter); In re Sunbeam Sec. Litig., 89 F.Supp.2d 1326, 1345 (S.D.Fla.1999) (finding the sheer magnitude of the company's restatement combined with the auditors' failure to recognize multiple red flags, including the existence of weak internal controls, and appropriately plan and modify its audit, established scienter); Carley Capital Group v. Deloitte & Touche, LLP, 27 F.Supp.2d 1324, 1339-1341 (N.D.Ga.1998) (holding that the drastic overstatement of financial results coupled with the allegations that the auditor defendants "were heavily involved in the management" of the company and had violated numerous GAAP and GAAS provisions provided "strong circumstantial evidence of reckless or conscious misbehavior"). While this case does involve a massive financial restatement, this fact alone cannot establish scienter on the part of the Deloitte defendants. The restatement resulted from fraud originating at USF which was actively concealed from the auditors. Where, as here, "the magnitude of the fraud was accompanied by the thoroughness of its concealment," scienter will not be inferred on the part of the auditor. In re Livent, 78 F.Supp.2d at 217.
The plaintiffs likewise fail to plead scienter with respect to the Deloitte defendants' review of the joint venture consolidation. The plaintiffs argue that the Deloitte defendants knew or recklessly disregarded the fact that Royal Ahold improperly consolidated joint venture revenue in violation of U.S. and Dutch GAAP. Under these prevailing accounting standards, a company may only consolidate joint venture revenue if it has control over the entity. (¶ 724) (citing GAR § 214:103a and NCC § 2:24b). Control can be demonstrated by majority ownership or by evidence that one party has the power to dictate decisions for the partnership. (See Accounting Research Bulletin No. 51, Consolidated Financial Statements, Deloitte U.S. Mot. to Dismiss, Ex. O and SEC Release No. 33-6641, 17 C.F.R. § 210.3A-02, Ex. P.) In the instant case, Royal Ahold represented that it had decision-making control over five separate joint ventures in which the company owned only a 50% interest (or 49% in the case of one).
The plaintiffs argue that from as early as 1998, the Deloitte defendants knew there was a problem with Royal Ahold's consolidation of joint ventures, yet the Deloitte defendants continued to sign off on Royal Ahold's consolidation. To support this allegation, plaintiffs rely on two letters: (1) the August 24, 1998 letter from Deloitte Netherlands to Meurs, and (2) the April 13, 2000 letter from Deloitte Netherlands to Meurs and the Royal Ahold Executive Board. (See July 13, 2004 Entwistle Aff., Ex. 2 and Ex. 3.) The August 24, 1998 letter stated that "after consultation with our U.S. National Office, [we concluded] that consolidation for the majority of the Ahold joint ventures was not acceptable under U.S. GAAP [for fiscal year 1997]."
The April 13, 2000 letter from Deloitte Netherlands to the Royal Ahold Executive Board and Meurs stated that "[a]fter some agitated discussions [regarding consolidation]...[o]ur National Office in the USA has permitted us to issue our opinion on
The August 1998 and April 2000 letters show that the Deloitte defendants were seeking confirmation that Royal Ahold did indeed have the requisite degree of control over the joint ventures to justify consolidation. These letters do not demonstrate, as plaintiffs suggest, that the Deloitte defendants recklessly encouraged Royal Ahold to "manufacture" evidence of control. The record shows that Royal Ahold eventually provided control letters which purported to grant control to Royal Ahold for the Bompreco, DAIH, Paiz Ahold, and ICA joint ventures, but not for JMR. (¶¶ 306, 342.) The plaintiffs contend that none of these control letters should have been relied upon and that the ICA control letter in particular was inherently "suspicious" and should not have been accepted by the Deloitte defendants. (¶¶ 24, 342.)
Plaintiffs' assertion that the Deloitte defendants "suggested the use of side letters to obscure the truth" about Royal Ahold's control over the joint ventures does not withstand scrutiny. (¶ 4.) Under the applicable accounting guidelines, a company may only consolidate a joint venture if it can show that it exercises control over the joint entity. (¶ 724) (citing Dutch GAAP provisions GAR § 214.103a and NCC § 2:24a(1)). Normally, control is evidenced by majority ownership, but it can also be established by showing that one party has the power to direct the joint venture's decisions.
The plaintiffs contend that the "questionable" nature and timing of the ICA
The plaintiffs themselves acknowledge that the second set of "side letters" that negated the control letters for ICA, Bompreco, DAIH, and Paiz Ahold were concealed from Deloitte. In their complaint, the plaintiffs quote from the Royal Ahold Supervisory Board's report to shareholders, which states that: "[t]he investigation into the joint venture letters found that there had been concealment of side letters from Ahold's Supervisory Board, Audit Committee and our auditors, Deloitte & Touche and that the consolidation of these joint ventures into Ahold's financial statements had been in error." (¶ 313.) If Deloitte were complicit in the joint venture fraud, as the plaintiffs repeatedly suggest in their opposition brief, there would be no reason for the Royal Ahold executives to conceal the side letters from the Deloitte defendants. Plaintiffs' allegations do not support a strong inference that Deloitte Netherlands was acting with scienter when it approved Royal Ahold's consolidation of its joint ventures. In re Sunterra Corp., 199 F.Supp.2d at 1338 ("[B]ecause an independent accountant often depends on its client to provide the information base for the audit, it is almost always more difficult to establish scienter on the part of the accountant than on the part of its client.") (citation omitted).
The plaintiffs argue that the Deloitte defendants should not have signed off on consolidating JMR, because the August 1998 and April 2000 letters establish that Royal Ahold never provided Deloitte with evidence that it controlled JMR. Deloitte Netherlands argues that from the beginning Royal Ahold represented to the public that "based on its direct managerial role, representation on JMR's board of directors and stockholders' agreements, Ahold includes [JMR] in the Company's consolidated financial statements." (See Dunst Dec., Ex. B at 13 and Ex. C at 14) (quoting Royal Ahold's 1997 and 1999 20-F). Therefore, Deloitte cannot be said to have purposely misled the public regarding Royal Ahold's ability to consolidate JMR. Moreover, both Deloitte defendants argue that because JMR only accounted for approximately 5% of Royal Ahold's total revenue in fiscal year 1999, less than 4% in fiscal year 2000, and less than 3% in fiscal year 2001, any financial misstatement resulting from consolidating JMR was immaterial as a matter of law. See, e.g., Glassman v. Computervision Corp., 90 F.3d 617, 633, n. 26 (1st Cir.1996) (holding that alleged misstatements ranging from 3% to 9% regarding the projected backlog of orders were immaterial); In re First Union
Examined collectively, the plaintiffs allegations do not support a strong inference that the Deloitte defendants knew or recklessly disregarded that Royal Ahold's financial statements were materially misstated due to the overstated promotional allowances and the improper consolidation of joint venture revenue. Some of the "red flags" relied on by plaintiffs demonstrate that the Deloitte defendants were aware of weak internal controls at USF and the need to independently verify the vendor rebate amounts, but they do not establish "an egregious refusal to see the obvious, or to investigate the doubtful," giving rise to a strong inference of recklessness. In re Oxford Health Plans, Inc., 51 F.Supp.2d at 295 (quotations and citations omitted). Similarly, the fact that the Deloitte defendants failed to discover the secret side letters negating the control letters does not indicate recklessness by the auditors, especially where, as here, the plaintiffs' complaint itself includes statements acknowledging that the Deloitte defendants were purposely misled by Royal Ahold executives. Accordingly, the § 10(b) and Rule 10b-5 claims against Deloitte U.S. and Deloitte Netherlands will be dismissed. Likewise, because the plaintiffs have failed to allege facts demonstrating scienter, let alone that the Deloitte defendants engaged in "deceptive or manipulative" conduct, the plaintiffs' Rule 10b-5(a) and (c) claims will be dismissed.
9. Ahold USA
The § 10(b) and Rule 10b-5 claims against Ahold USA must be dismissed because the complaint fails to allege facts sufficient to create a strong inference of scienter. In their attempt to create an inference of scienter, the plaintiffs allege that Ahold USA knew about the accounting fraud that occurred at its subsidiaries, Tops and Giant-Carlisle. The complaint, however, offers no factual allegations or red flags supporting this conclusion. Instead, the plaintiffs rely on the fact that the companies share a parent-subsidiary relationship. It cannot simply be assumed that Ahold USA, as the parent company, was aware of or reckless in not knowing about the fraud at its subsidiaries, Tops and Giant-Carlisle. See Alpharma Inc. Sec. Litig., 372 F.3d 137, 151 (3rd Cir.2004); In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 554 (6th Cir.1999); Chill v. General Electric Co., 101 F.3d 263, 270-71 (2nd Cir.1996). In addition, the plaintiffs argue that because Tobin and Grize, who both served as President of Ahold USA, were allegedly aware of the fraud at USF,
10. Ahold USA Holdings
The complaint is completely devoid of any factual allegations that could create a
In their motion to dismiss, the Royal Ahold defendants argue that the allegations concerning the fraud at Disco, the fraud at Tops and Giant-Carlisle, and certain statements concerning Royal Ahold's integration of its acquisitions should be stricken.
The Royal Ahold Defendants argue that the allegations should be stricken because they are immaterial. The defendants also argue that the allegations concerning the fraud that took place at Disco, Tops, and Giant-Carlisle, should be stricken because the plaintiffs have not adequately pled scienter with respect to such fraud. The proper inquiry on a motion to strike, however, is not whether the defendants acted with scienter, but instead, whether the allegations pertaining to such fraud are materially relevant to the plaintiffs' claims. Under the Federal Rules of Civil Procedure, courts have the discretion to strike from any pleading "any redundant, immaterial, impertinent or scandalous matter." Fed.R.Civ.P. 12(f). Therefore, in deciding the Royal Ahold Defendants' motion to strike certain allegations, I will consider whether the allegations at issue are material to the claims brought by the plaintiffs.
1. Disco
In January 1998, Royal Ahold established Disco Ahold International Holdings N.V. [DAIH], a 50/50 joint venture with Velox Retail Holdings [VRH]. At the outset of the joint venture, DAIH controlled 50.35% of Disco, and on November 13, 1998, DAIH purchased the remaining portions of Disco. In July 2001, Royal Ahold acquired additional shares of DAIH from VRH, increasing its ownership percentage to 55.9%. Following VRH's default on a debt, in August 2002 Royal Ahold assumed full ownership of DAIH, including its subsidiary, Disco. (¶ 165.) The plaintiffs allege that in its 2002 Form 20-F, Royal Ahold admitted that its internal investigation of Disco's operations revealed fraud because of a "series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented." (¶ 313.) Royal Ahold's financial restatement following the fraud at Disco amounted to a difference of 8 million euros on its pre-tax earnings. (¶ 256.) In total, the wrongdoing at Disco inflated Royal Ahold's pre-tax earnings by 0.48% for 2000
The Supreme Court has rejected the use of a strict numerical formula or a bright-line test for materiality, stating that "[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive and underinclusive." Basic Inc. v. Levinson, 485 U.S. 224, 236, n. 14, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). In addition, though it lacks the force of law, "the SEC has commented that various `[q]ualitative factors may cause misstatements of quantitatively small amounts to be material.'" Ganino v. Citizens Utilities Co., 228 F.3d 154, 162-63 (2nd Cir.2000) (quoting SEC Staff Accounting Bulletin No. 99, 17 C.F.R. pt. 211, subpt. B). As a result, questions of materiality concerning fraud should not be decided quantitatively based on a bright-line cutoff but instead, the "total mix of information" should be looked at qualitatively.
While not outcome determinative, the fact that the fraud at Disco amounted to such a minuscule portion of Royal Ahold's pre-tax earnings indicates that it is unlikely such information would have "significantly altered the `total mix' of information made available." Basic, 485 U.S. at 232, 108 S.Ct. 978. See also Hillson, 42 F.3d at 219 (holding that a company's income prediction, which was off by only 0.5%, was immaterial); In re First Union Corp. Sec. Litig., 128 F.Supp.2d 871, 895 (W.D.N.C.2001) (holding that losses of understatement of "a mere 2.1 percent of operating earnings" are immaterial). In addition to the relatively small financial impact of the fraud at Disco, it is also unimportant with respect to the central issues in this case. Disco, which owns supermarkets in Argentina, is an overseas subsidiary of Royal Ahold. The fraud at Disco is not linked to the improper consolidations or joint ventures that took place at Royal Ahold or to the fraudulent promotional allowances at USF. Consequently, because the fraud at Disco amounted to only 0.48% of Royal Ahold's pre-tax earnings and is unrelated to the alleged fraud at Royal Ahold and USF, the allegations concerning Disco are immaterial as a matter of law and the Royal Ahold defendants' motion to strike such allegations will be granted.
2. Tops and Giant-Carlisle
The vendor allowance fraud that took place at Tops and Giant-Carlisle was remarkably similar to the fraud that took place at USF. (See, e.g., ¶ 35.) In its 2002 Form 20-F, Royal Ahold disclosed that its internal investigation revealed that the accounting fraud at Tops "consisted of intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, overbillings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management" and the fraud at Giant-Carlisle "consisted of pervasive earnings management, including the intentional deferral of earned vendor allowance receivables and vendor allowance accrued reserves, as well as the improper holding of company funds at vendors." (¶ 35.) Similarly, the fraud at USF involved "fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold." (Id.) As a result, the fraud at Tops and Giant-Carlisle may be material to understanding and proving
3. Statements Concerning Royal Ahold's Integration of Its Acquisitions
The plaintiffs have alleged that the defendants made false and misleading statements regarding the integration of Royal Ahold's acquisitions. In response, the Royal Ahold defendants argue that those statements should be stricken because they are immaterial puffery and, therefore, are not actionable. As discussed earlier, the plaintiffs have adequately stated a claim under Rule 10b-5(b) against Royal Ahold and certain individual defendants based on false statements and SEC filings made by the defendants. While some of the statements cited by plaintiffs will not be actionable, at this stage of the proceedings, I need not address each individual statement allegedly made by the defendants to make that determination. The defendants' motion to strike these allegations will be denied.
Plaintiffs also bring claims under § 11 and § 12(a)(2) of the Securities Act of 1933 based on allegedly false and misleading statements in the registration statement and the prospectuses associated with the September 2001 Global Offering.
Under § 11 of the Securities Act of 1933, any person acquiring a security issued pursuant to a materially false or misleading registration statement may recover damages. Section 11 imposes liability when "any part of the registration statement, when such part became effective, contained an untrue statement of material fact" or a material omission. 15 U.S.C. § 77k(a). "[A]ny person acquiring such security" may sue certain enumerated persons, such as those who signed the registration statement, directors, accountants, and underwriters. Id. Unlike the anti-fraud provision § 10(b) which requires plaintiffs to prove scienter and reliance on the misleading statement, § 11 has generally been regarded as imposing a negligence or strict liability standard. See Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983) ("If a plaintiff purchased a security
Courts have construed § 11 narrowly, holding that only plaintiffs who can trace their shares to the particular false or misleading registration statement may benefit from the strict liability imposed by § 11. See, e.g., Lee v. Ernst & Young LLP, 294 F.3d 969, 976-977 (8th Cir.2002) (a cause of action under § 11 "exists for any person who purchased a security that was originally registered under the allegedly defective registration statement-so long as the security was indeed issued under that registration statement and not another."); Barnes v. Osofsky, 373 F.2d 269, 272 (2d Cir.1967) (reasoning that § 11 was meant to provide a remedy only for those who purchased shares pursuant to a particular registration statement, whereas other provisions which contain some form of a scienter requirement are not limited to newly registered securities); In re Global Crossing, 313 F.Supp.2d at 207-208 (holding that only plaintiffs who purchased shares under the misleading registration statement had standing under § 11, noting that "[t]hose who purchased in the open market shares that were properly registered in an earlier offering are relegated to the securities fraud remedies that include [scienter and reliance] requirements"); Kirkwood v. Taylor, 590 F.Supp. 1375, 1378 (D.Minn.1984) (noting that the "[s]trict application of the tracing requirement ... is consistent with the statutory scheme").
Section 12(a)(2) of the Securities Act provides a remedy for a person who purchases a security from another person who offered or sold such security "by means of a prospectus ... which includes an untrue statement of material fact" or a material omission. 15 U.S.C. § 77l(a)(2). Section 12(a)(2) also has been regarded as imposing a negligence standard. See Hershey v. MNC Financial, Inc., 774 F.Supp. 367, 375 (D.Md.1991). Under § 12(a)(2), standing is limited to those persons who purchased securities pursuant to public offerings made via a prospectus, and does not extend to individuals who purchased securities under private sales contracts. Gustafson v. Alloyd, Inc., 513 U.S. 561, 580-84, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995). The Supreme Court has interpreted "offers or sells" to apply to any person who passes title or interest in a security to a buyer for value or solicits an offer to buy a security. Pinter v. Dahl, 486 U.S. 622, 642-51, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988) (focusing on the "defendant's relationship with the plaintiff-purchaser" and rejecting the "substantial factor" test to determine liability for fear that this approach would expose lawyers, accountants and other professionals ancillary to the sales transaction to liability under § 12). See also Gasner v. Bd. of Sup'rs of the County of Dinwiddie, 103 F.3d 351, 365 (4th Cir.1996) (acknowledging the Pinter holding); In re RAC Mortgage Inv. Corp. Sec. Litig., 765 F.Supp. 860, 865 (D.Md.1991) (noting that although the Pinter court was interpreting the meaning of a statutory seller within the context of § 12(1), the Second, Third, Fifth and Ninth Circuits have extended the holding to § 12(a)(2)). The Pinter holding limited § 12(a)(2) liability to "immediate sellers," or those who were directly involved in the actual solicitation of a securities purchase. 486 U.S. at 644, n. 21, 108 S.Ct. 2063. The Supreme Court emphasized that "[t]he solicitation of a buyer is perhaps the most critical stage of the selling transaction ... brokers and other solicitors are well positioned to control the flow of information to a potential purchaser, and in fact, such persons are the participants in the selling transaction who most often disseminate material information to investors." Id. at 646, 108 S.Ct. 2063. The Pinter"immediate seller" requirement has been interpreted to mean that in a firm commitment underwriting, where the issuer of securities sells shares to underwriters who in turn resell the shares to the public, the issuer and its agents can only be liable under § 12(a)(2) if they" `successfully solicit[ed]'" the plaintiff's purchase of securities," and were "`motivated at least in part by a desire to serve [their] own financial interests or those of the securities owner.'" Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1215 (1st Cir.1996) (quoting Pinter, 486 U.S. at 647, 108 S.Ct. 2063). Accordingly, "neither involvement in preparation of a registration statement or prospectus nor participation in `activities' relating to the sale of securities, standing alone, demonstrates the kind of relationship between defendant and plaintiff
In some instances, courts have acknowledged that determining whether a defendant qualifies as a statutory seller under § 12(a)(2) is a "question of fact, not properly decided on a motion to dismiss." In re Stratosphere, 1 F.Supp.2d at 1120. See also In re Paracelsus Corp., 6 F.Supp.2d 626, 632 (S.D.Tex.1998) (observing that "[t]he determinations of a `seller' under the leading cases that have interpreted Section 12...have been rather fact intensive questions," and therefore should be considered "in an evidentiary context rather than on a bare pleading") (citations omitted).
Before determining whether the plaintiffs have standing to sue under § 11 and § 12, I will discuss whether Rule 9(b) applies to these claims. Because § 11 and § 12 are based in negligence and do not include a scienter requirement, Newcome v. Esrey, 862 F.2d 1099, 1106 (4th Cir.1988), it is generally recognized that Fed.R.Civ.P. 9(b) does not apply to such claims. See In re USEC Sec. Litig., 190 F.Supp.2d 808, 826 (D.Md.2002) ("[A] plaintiff is not required under § 11 to plead or prove fraud. Liability under § 11 is virtually absolute even for innocent misstatements.") (citing Huddleston, 459 U.S. at 382, 103 S.Ct. 683); In re Jiffy Lube Sec. Litig., 772 F.Supp. 258, 260 (D.Md.1991) ("Section 11 sounds in negligence, not fraud, and therefore, is not subject to the particularity requirements of Fed.R.Civ.P. 9(b)."). While recognizing that scienter is not an element of § 11 and § 12, many circuit courts and at least one court in this district have nonetheless required that the plaintiffs' allegations be pled with particularity pursuant to Fed.R.Civ.P. 9(b) when the plaintiff's claims sound in fraud. See Rombach v. Chang, 355 F.3d 164, 170-71 (2d Cir.2004); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir.1996); Melder v. Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir.1994); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir.1992); Sears v. Likens, 912 F.2d 889, 893 (7th Cir.1990); Hershey v. MNC Financial, Inc., 774 F.Supp. 367, 376 (D.Md.1991) (holding that Rule 9(b) applies to § 11 and § 12 claims when these claims are essentially "averments of fraud"). In so holding, courts have applied Rule 9(b) when plaintiffs nominally assert their § 11 and § 12 claims "do not sound in fraud" but make no effort to support such claims with non-fraud or negligence allegations. In re Stac Elecs. Sec. Litig., 89 F.3d at 1405 n. 2 ("nominal efforts are unconvincing where the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims levied at the Prospectus."). See also In re Ultrafem
The Section 11 and 12 defendants (minus Royal Ahold) urge the court to apply the heightened pleading standard of Rule 9(b) and to find that the plaintiffs have failed to plead their § 11 and § 12 claims with sufficient particularity. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The plaintiffs contend that Rule 9(b) is wholly inapplicable to § 11 and § 12 because they have not alleged fraud for those claims, and that even if Rule 9(b) did apply, they have met its requirements. I agree with the plaintiffs. First, I find the § 11 and § 12 claims are not based on allegations of fraud, and therefore Rule 9(b) does not apply to them. The plaintiffs' complaint states: "for the purposes of [Section 11 and Section 12 claims], Lead Plaintiffs expressly exclude any allegation that could be construed as alleging fraud or intentional or reckless misconduct. [These claims are] not based on and [do] not sound in fraud." (¶ 827.) If this is all plaintiffs had done to avoid Rule 9(b), the court would be inclined to find Rule 9(b) applies. However, in pleading their § 11 and § 12 claims, the plaintiffs selected certain paragraphs from the complaint that specified in what ways the September 2001 Offering documents were untrue and misleading as well as paragraphs that described the role of the § 11 and § 12 defendants. (¶¶ 827, 839.) Therefore, the complaint sets out particular allegations, not fraud based, which are sufficient to support § 11 and § 12 claims. Defendants argue that simply by pleading the September 2001 Global Offering documents contained "untrue statements of material fact," (See, e.g., ¶¶ 604-07, 830) and the documents were "materially false and misleading," (See, e.g., ¶¶ 625, 830) the plaintiffs have alleged fraud. The court disagrees. The plaintiffs are employing the statutory language of § 11 and § 12, see 15 U.S.C. § 77k(a) and 15 U.S.C. § 77l(a)(2), and both of these provisions impose a strict liability or negligence standard. See Hochfelder, 425 U.S. at 208, 96 S.Ct. 1375; Hershey, 774 F.Supp. at 375. It is hard to imagine what else plaintiffs could do, short of filing an entirely separate complaint, to differentiate their § 11 and § 12 pleadings from the allegations supporting their § 10(b) and Rule 10b-5 claims. As the Eighth Circuit reasoned, "§ 11 does not require proof of fraud for recovery," and "a pleading standard which requires a party to plead particular facts to support a cause of action that does not include fraud or mistake as an element comports neither with Supreme Court precedent nor with the liberal system of `notice pleading.'" In re NationsMart, 130 F.3d at 315 (citations omitted).
Considering the issue of traceability, however, plaintiffs have not adequately stated a claim under § 11. The complaint alleges that "Lead Plaintiff COPERA purchased Ahold common stock at artificially inflated prices on foreign exchanges during the Class Period, including shares purchased pursuant to the registration and prospectus issued in connection with Ahold's September 2001 Global Offering, and suffered more than $16 million in losses
Therefore, when plaintiffs allege they bought shares "on foreign exchanges" in the September 2001 Global Offering, they are essentially stating they bought unregistered shares. Because § 11 liability is premised on purchases made pursuant to a registration statement containing an untrue statement of material fact or a material omission, plaintiffs have no claim under § 11.
Plaintiffs argue that the Royal Ahold shares sold overseas in the September 2001 Global Offering were already registered under the December 29, 2000 Registration Statement, and that the subsequent September 2001 Prospectus Supplement could not, as a matter of law, "de-register" them. (See Pls.' Mem. in Opp'n to the Lead Underwriters' Mot. to Dismiss at 11-14.) The plaintiffs also argue that because the September 2001 Global Offering consisted of sales and offers made both in the United States and overseas, the offering could not qualify as an "offshore transaction" exempting the overseas shares from registration under Regulation S. (Id.)
The December 29, 2000 Registration Statement was a "shelf" registration statement. As the lead underwriter defendants explain, a shelf registration statement generally contains basic information about a company and "a specific maximum dollar value of securities, typically without identifying any specific security" that the company plans to issue "from time to time at indeterminate prices." (See Lead Underwriters' Resp. in Supp. of Mot. to Dismiss at 7.) When the issuer wants to offer registered securities, the issuer "takes off the shelf" specific securities by preparing a prospectus supplement that provides information about those securities. It is only after the prospectus supplement is completed that those securities can be sold. (Id.) See generally Shaw, 82 F.3d at 1208 (explaining the shelf registration process); Loss & Seligman, Securities Regulation, Vol. I, Chapt. 2, p. 369 (1998) (explaining that shelf registration statements permit an issuer to take advantage of market conditions and incur lower issuing costs). The December 29, 2000 Registration Statement listed a variety of debt and equity securities that could be offered, as well as a maximum dollar value of $3.95 billion, but it did not specify quantities or prices for specific securities or when they would be offered. (See July 28, 2004 Entwistle Aff., Ex. 1) Only the September 2001 Prospectus Supplement contained specific information about the type of securities to be offered (ADSs and common shares) and the price for each ($ 28.3814 and 31.9 euros respectively). (See July 28 Entwistle Aff.,
The plaintiffs argue that the September 2001 Global Offering cannot be separated into one offering made overseas pursuant only to the September 2001 Prospectus Supplement, and one offering in the United States pursuant to both the September 2001 Prospectus and the December 29, 2000 Registration Statement. They contend the September 2001 Global Offering should be viewed as one integrated offering made pursuant to the December 29, 2000 Registration Statement. (See Pls.' Mem. in Opp'n to the Lead Underwriters' Mot. to Dismiss at 15). In support of their argument, plaintiffs rely on Regulation D, the SEC regulation which exempts certain non-public offerings from registration requirements. (Id.) (citing Non-Public Offering Exemption, Securities Act Release No. 4552 (Nov. 9, 1962) (July 28, 2004 Entwistle Aff., Ex. 10) and Regulation D-Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933, 17 C.F.R. § 230.502 (July 28, 2004 Entwistle Aff., Ex. 11)). The SEC has issued guidance to determine whether a series of offerings purportedly made under Regulation D should be "integrated" and viewed as one public or private transaction in order to determine whether the issuer can validly claim that all the securities were offered in a non-public transaction. (See Non-Public Offering Exemption, Securities Act Release No. 4552 (Nov. 9, 1962) (July 28, 2004 Entwistle Aff., Ex. 10)). Plaintiffs' reliance on the Regulation D "integration" factors is misplaced; the defendants made the overseas offering pursuant to Regulation S, not Regulation D. The plaintiffs do not provide any authority to support their claim that the defendants could not simultaneously offer shares in the United States pursuant to a shelf registration statement and shares overseas pursuant to Regulation S. The lead underwriter defendants point out that Regulation S explicitly recognizes that "[o]ffshore transactions made in compliance with Regulation S will not be integrated with registered domestic offerings or domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act, even if undertaken contemporaneously." (See SEC Release No. 6863 (April 24, 1990)) (emphasis added). In separate guidance for Regulation D, the SEC has also articulated a general policy against integrating Regulation S offerings with other simultaneous offerings. (See 17 C.F.R. § 230.502, "[g]enerally, transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offerings being made outside the United States in compliance with Regulation S.") Thus, it appears that the overseas component of the September 2001 Global Offering is not required to be integrated with the registered domestic offering.
The plaintiffs also argue that the defendants cannot claim the Regulation S exemption because they participated in "directed selling efforts" in the United States when they filed slide presentations and press releases with the SEC promoting the benefits of Royal Ahold's aquisition of Bruno's and Alliant in connection with the September 2001 Global Offering. Because Regulation S applies only to offshore transactions, that is, offers and sales made
During oral argument plaintiffs did not contest the lead underwriter defendants explanation of the shelf registration process and did not provide any authority to support their claim that an issuer cannot conduct a simultaneous offering of registered shares in the United States, issued pursuant to a shelf registration statement, and unregistered shares overseas pursuant to Regulation S. Therefore the defendants' motions to dismiss the plaintiffs' § 11 claim will be granted.
The plaintiffs also fail to state a claim under § 12(a)(2), because they have not alleged they purchased shares from or were solicited by either Royal Ahold, the lead underwriters or Meurs and Van der Hoeven. The plaintiffs' complaint alleges that each of these defendants "draft[ed], revis[ed] and/or approv[ed] the September 2001 Prospectus Supplement" and "jointly orchestrat[ed] all activities necessary to effect the sale of these securities to the investing public, by issuing the securities, promoting the securities and/or supervising their distribution and ultimate sale to the investing public." (¶ 842.) The complaint also alleges that each of these defendants was motivated to participate in the September 2001 Global Offering by their own financial interest. (¶¶ 595, 599.) But nowhere in the complaint do plaintiffs allege they purchased Royal Ahold shares from or were solicited by Royal Ahold, the lead underwriters, or Van der Hoeven and Meurs. During oral argument plaintiffs' counsel stated that COPERA "purchased its shares through agents, agent banks in Europe." (See September 23, 2004 Motions Hearing Transcript at 45.) Section 12(a)(2) provides that any person who "offers or sells a security" by means of a false or misleading "prospectus or oral communication" shall be liable "to the person purchasing such security from him." 15 U.S.C. § 77l(a)(2). It is possible to hold an issuer liable as a statutory seller under § 12(a)(2) when there has been a firm commitment underwriting, see Shaw, 82 F.3d at 1215-16, but only if there has been sufficient activity to constitute "solicitation." Mere participation in the preparation of the prospectus will not trigger § 12(a)(2) liability. Id. In order to state a claim under § 12(a)(2), the complaint must allege by whom the plaintiffs were solicited and from whom they purchased shares; these assertions must be supported by specific factual allegations demonstrating a direct relationship between the defendant and the plaintiff-purchaser. Pinter, 486 U.S. at 651, 108 S.Ct. 2063. Because plaintiffs have failed to do so, their
The plaintiffs charge each of the named individual defendants with control person liability under § 20(a) of the Exchange Act (Count III) and § 15 of the Securities Act (Count VI).
The defendants argue that a third element, culpable participation, is required to state a claim for control person liability. See In re Criimi Mae, 94 F.Supp.2d at 657 (noting that to state a claim for control person liability under § 20(a), a plaintiff must allege "a primary violation by the
It is clear under Fourth Circuit law that liability under Section 20(a) ultimately may be imposed only on those "who are in some meaningful sense culpable participants in the acts perpetrated by the controlled person." Carpenter v. Harris, Upham & Co., 594 F.2d 388, 394 (4th Cir.1979). The Carpenter opinion, however, also notes that "[i]n order to satisfy the requirement of good faith it is necessary for the controlling person to show that some precautionary measures were taken to prevent an injury caused by an employee." Id. Carpenter does not directly address or resolve the question of what must be pled to survive a motion to dismiss. Based on the language of § 20(a), which states an affirmative defense for defendants who act in good faith, I agree with the court in In re MicroStrategy that plaintiffs are not required to allege "culpable participation" beyond the facts of control and the underlying violation by the controlled person in order to state a claim.
To state a control person liability claim, under either § 20(a) or § 15, the plaintiffs must allege that the defendants acted as control persons over primary violators of § 10(b), or § 12. Under both § 15 and § 20(a), control has the same meaning. In re Initial Public Offering, 241 F.Supp.2d at 393. As the court in In re MicroStrategy explained:
The SEC defines "control" as "possession, direct or indirect of the power to
115 F.Supp.2d at 661 (quoting Brown v. Enstar Group, Inc., 84 F.3d 393, 396 (11th Cir.1996)). Furthermore, determining whether an individual is a control person presents a "complex factual question," SEC v. Coffey, 493 F.2d 1304, 1318 (6th Cir.1974), and "as such, it is `not ordinarily subject to resolution on a motion to dismiss,' dismissal is appropriate only when `a plaintiff does not plead any facts from which it can reasonably be inferred the defendant was a control person.'" In re MicroStrategy, 115 F.Supp.2d at 661 (quoting Maher v. Durango Metals, Inc., 144 F.3d 1302, 1306 (10th Cir.1998)). See also In re Cabletron Sys., Inc., 311 F.3d 11, 41 (1st Cir.2002); In re Cable & Wireless, 321 F.Supp.2d 749, 775 (E.D.Va.2004).
In In re Initial Public Offering, 241 F.Supp.2d at 352, the plaintiffs alleged "[e]ach of the Individual Defendants was a control person of the Issuer with respect to the IPO [and]...[a]s a result, the Individual Defendants are liable under Section 15 of the Securities Act for the Issuer's primary violation of Section 11 of the Securities Act," and the court held that allegation, in combination with the allegations supporting the underlying § 11 claims, provided the defendants with adequate notice of the claims against them. Similarly, the court in MicroStrategy was persuaded the control person claims were adequately pled because the complaint alleged the "positions within the Company of each Control Group Defendant; that these Defendants prepared, reviewed executed, and disseminated ... public reports and/or press releases issued by, and otherwise acted on behalf of MicroStrategy; and that these Defendants possessed significant voting power by virtue of their holdings of securities in MicroStrategy." MicroStrategy, 115 F.Supp.2d at 661 (citations omitted).
The plaintiffs' complaint alleges that Van der Hoeven, Meurs, de Ruiter, Andreae, Tobin, Grize and Miller acted as control persons for Royal Ahold (¶ 824); that Tobin and Grize were control persons for Ahold USA (Id.); and that Miller, Resnick, Kaiser and Lee acted as control persons for USF (Id.). In support of their § 20(a) claim, the plaintiffs allege that these individuals had "direct and supervisory involvement in the day-to-day operations" of the companies (¶ 825), and that they "influenc[ed] and control[led], directly or indirectly, the decision-making of [the companies], including the content and dissemination of the various statements and SEC filings that Lead Plaintiffs allege are false and misleading." (¶ 824.)
The plaintiffs have pled "facts from which it can reasonably be inferred the defendant[s] w[ere] control person[s]." MicroStrategy, 115 F.Supp.2d at 661. The plaintiffs have adequately pled that Van der Hoeven, Meurs, Andreae, Tobin, Grize and Miller were all control persons for Royal Ahold. Each served on Royal Ahold's Executive Board, the body directly responsible for managing the company, for some portion of the class period and each is alleged to have participated in controlling, directly and indirectly, Royal Ahold's corporate policies and decision making.
In addition to pleading that the individual defendants are control persons, the plaintiffs must also allege that the individual defendants controlled the primary violators of § 10(b) in order to satisfy the requirements of § 20(a). Miller, Resnick, and Kaiser are all alleged to be control persons of USF and the complaint adequately states an underlying § 10(b) claim against USF and controlled individuals at USF.
To establish control person liability under § 15 of the Exchange Act, the plaintiffs must adequately allege that the individual defendants acted as control persons over the primary violators of § 12(a)(2). As previously discussed, the complaint adequately alleges that defendants Van der Hoeven, Meurs, Tobin, Grize, Andreae, Resnick, Kaiser, and Miller were control persons. The plaintiffs, however, have failed to state a claim under § 11 or § 12(a)(2) and as a result, the plaintiffs have also failed to state a claim under § 15. As with the plaintiffs' § 12(a)(2) claims, however, the plaintiffs' § 15 claims will be dismissed with 60 days to seek leave to amend. To the extent that the
For the foregoing reasons, the motions to dismiss and motions to strike will be granted in part and denied in part, as detailed in the order that follows.
ORDER
For the reasons stated in the foregoing Memorandum, it is hereby
1. the Fed.R.Civ.P. 12(b)(2) motions to dismiss for lack of personal jurisdiction submitted by foreign individual defendants Fahlin, Boonstra, and de Ruiter are
2. the Fed.R.Civ.P. 12(b)(1) motions submitted by all defendants to dismiss the claims of foreign purchasers of Royal Ahold shares on foreign exchanges for lack of subject matter jurisdiction are
3. the global underwriter defendants' Fed.R.Civ.P. 12(b)(1) motion to dismiss the § 11 and § 12(a)(2) claims for lack of subject matter jurisdiction is
4. the Fed.R.Civ.P. 12(b)(6) motions submitted by all defendants to dismiss all allegations concerning conduct that pre-dates July 30, 1999 as barred by the statute of limitations are
5. the Fed.R.Civ.P. 12(b)(6) motions to dismiss the § 10(b) and Rule 10b-5 claims submitted by defendants Tobin, Grize, Resnick, Deloitte & Touche LLP ("Deloitte U.S."), Deloitte & Touche Accountants ("Deloitte Netherlands"), Ahold USA and Ahold USA Holdings are
6. the Deloitte & Touche LLP ("Deloitte U.S.") Fed.R.Civ.P. 11 motion to strike certain allegations is
7. the Royal Ahold defendants' (along with individual defendants Van der Hoeven and Meurs) Fed.R.Civ.P. 12(f) motion to strike all allegations concerning misconduct at Ahold USA subsidiaries Tops and Giant-Carlisle and allegations concerning the realization of synergies and the integration of acquisitions is
8. the Fed.R.Civ.P. 12(b)(6) motions to dismiss the § 11 and § 12(a)(2) claims submitted by Royal Ahold, the lead underwriters, the Deloitte defendants, and the individual defendants are
9. the Fed.R.Civ.P. 12(b)(6) motions to dismiss the control person liability claims under § 20(a) submitted by defendants Miller, Resnick, Kaiser, Van der Hoeven, Meurs, Andreae, Tobin, and Grize are
FootNotes
(1) 2 years after the discovery of the facts constituting the violation; or
(2) 5 years after such violation. 28 U.S.C. § 1658. Sections 804(b) and (c) also state that its provisions "shall apply to all proceedings addressed by this action that are commenced on or after the date of enactment of this Act.... Nothing in this section shall create a new, private right of action." Sarbanes-Oxley Act §§ 804(b) and (c); 28 U.S.C. § 1658(b) and (c). This provision applies to claims which are fraud-based, such as § 10(b) and Rule 10b-5 claims, but not to § 11 or § 12 claims which do not sound in fraud and therefore are governed by the original one year-three year regime. See In re WorldCom, Inc. Sec. Litig., No.02 Civ. 3288, 03 Civ. 9499, 2004 WL 1435356, *4 (S.D.N.Y.2004)."
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. § 78t(a).
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under [section 11 and 12], shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
15 U.S.C. § 77o.
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