In re K-Tel Intern., Inc., Securities Litigation
| Decision Date | 31 July 2000 |
| Docket Number | No. Civ. 98-2519 ADM/JGL.,No. Civ. 98-2649 ADM/JGL.,No. Civ. 98-2663 ADM/JGL.,No. Civ. 98-2520 ADM/JGL.,No. Civ. 98-2480 ADM/JGL.,No. Civ. 98-2494 ADM/JGL.,No. Civ. 98-2526 ADM/JGL.,No. Civ. 99-149 ADM/JGL.,No. Civ. 99-214 ADM/JGL.,No. Civ. 98-2558 ADM/JGL.,No. Civ. 99-216 ADM/JGL.,No. Civ. 99-215 ADM/JGL.,No. Civ. 98-2634 ADM/JGL.,No. Civ. 98-2531 ADM/JGL.,No. Civ. 98-2534 ADM/JGL.,No. Civ. 99-209 ADM/JGL.,No. Civ. 98-2563 ADM/JGL.,No. Civ. 98-2557 ADM/JGL.,No. Civ. 98-2580 ADM/JGL.,No. Civ. 99-150 ADM/JGL.,No. Civ. 98-2559 ADM/JGL.,No. Civ. 99-92 ADM/JGL.,No. Civ. 99-148 ADM/JGL.,Civ. 98-2494 ADM/JGL.,Civ. 98-2480 ADM/JGL.,Civ. 98-2519 ADM/JGL.,Civ. 98-2520 ADM/JGL.,Civ. 98-2526 ADM/JGL.,Civ. 98-2531 ADM/JGL.,Civ. 98-2534 ADM/JGL.,Civ. 98-2557 ADM/JGL.,Civ. 98-2558 ADM/JGL.,Civ. 98-2559 ADM/JGL.,Civ. 98-2563 ADM/JGL.,Civ. 98-2580 ADM/JGL.,Civ. 98-2634 ADM/JGL.,Civ. 98-2649 ADM/JGL.,Civ. 98-2663 ADM/JGL.,Civ. 99-92 ADM/JGL.,Civ. 99-148 ADM/JGL.,Civ. 99-149 ADM/JGL.,Civ. 99-150 ADM/JGL.,Civ. 99-209 ADM/JGL.,Civ. 99-214 ADM/JGL.,Civ. 99-215 ADM/JGL.,Civ. 99-216 ADM/JGL. |
| Citation | 107 F.Supp.2d 994 |
| Parties | In re K-TEL INTERNATIONAL, INC., SECURITIES LITIGATION. |
| Court | U.S. District Court — District of Minnesota |
Richard A. Lockridge, Karen M. Hanson, Gregg M. Fishbein, Lockridge, Grindal, Nauen, P.L.L.P., Minneapolis, MN, Stephen J. Fearon, Jr., James Jay Seirmarco, Abbey, Gardy & Squitieri, LLP, New York City, William S. Lerach, Katherine L. Blanck, Kimberly C. Epstein, Milberg, Weiss, Bershad, Hynes & Lerach LLP, San Francisco, CA, Frederic S. Fox, Janine R. Azriliant, Kaplan, Kilsheimer & Fox, LLP, New York City, Garrett Blanchfield, Reinhardt & Anderson, St. Paul, MN, John Halebian, Scott A. Kamber Wechsler, Harwood, Halebian & Feffer, LLP, New York City, for the lead plaintiffs and the class.
Karl L. Cambronne, Chestnut & Cambronne, P.A., Minneapolis, MN, Jonathan J. Lerner, Lea Haber Kuck, Jacob Hollinger, Skadden, Arps, Slate, Meagher & Flom LLP, New York City, for the defendants.
In this class action, Plaintiffs allege Defendant K-tel International, Inc. ("K-tel"), through individually named Defendants Philip Kives ("Kives"), Lawrence Kieves ("Kieves"), David Weiner ("Weiner"), Corey Fischer ("Fischer") and Jeffrey Mark Koblick ("Koblick") (collectively, "Individual Defendants"), violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), codified at 15 U.S.C. § 78j, as well as Securities and Exchange Commission (the "SEC") Rule 10b-5 promulgated thereunder. Plaintiffs also allege claims against Defendants Kives, Kieves, and Koblick, asserting Section 20(a) control person and Section 20A insider trading claims.
On May 10, 2000, the undersigned United States District Judge heard Defendants' Motion to Dismiss [Doc. No. 44] the Amended Consolidated Class Action Complaint (the "Amended Complaint").1 For the reasons set forth below, the motion is granted.
K-tel is a Minnesota corporation with its principal place of business in Plymouth, Minnesota. K-tel markets and distributes entertainment and consumer products, including prerecorded music compilations. K-tel's music operations consist of the sale of pre-recorded music through traditional and, more recently, Internet retail distribution. See Am.Compl. ¶ 19.
K-tel common stock is publicly traded on the NASDAQ National Market System (the "NMS"). Plaintiffs' allegations of securities fraud have one overarching and recurring theme: K-tel concealed its inability to comply with the National Association of Securities Dealers' (the "NASD") $4 million minimum tangible net asset requirement necessary for continued listing on the NMS. Plaintiffs contend Individual Defendants violated accounting principles to conceal the risk of delisting and boasted collaborations with significant market players to boost share price, both culminating in profitable insider sales.
K-tel's share price began climbing in April 1998. On April 21, 1998, K-tel declared a two-for-one common stock split in the form of stock dividends paid to shareholders of record on May 1, 1998. See Form 10-K at Part II, Item 5. To capitalize on the fast-growing E-commerce business expansion, on May 1, 1998, K-tel launched K-tel Express, an on-line music retailing business. See Am.Compl. ¶ 19. K-tel's share price quickly increased significantly, after adjusting for the two-for-one stock split. See March 31, 1998 Form 10-Q at ¶ 5. For example, within one month, K-tel's share price jumped from $3.31 (April 6, 1998) to $33.94 (May 5, 1998). See NASDAQ Pricing History and Form 10-K at Part II, Item 5 (Fourth Quarter High of $39.94 and Low of $3.25).
On May 5, 1998, four days after the stock split, K-tel announced the financial results for its third quarter ending March 31, 1998, referencing a decline in sales and income. Three days later, K-tel filed its Form 10-Q for the period ending March 31, 1998 (the "March 10-Q") that repeated the negative financial information previously released in the May 5 announcement. Defendants Kives, Weiner, and Fischer signed the March 10-Q. See Am.Compl. ¶¶ 20a, 20c, 20d. Between May 5, 1998 and June 9, 1998, K-tel's share price dropped from $33.94 to $11.25. See NASDAQ Pricing History.
On September 28, 1998, K-tel filed a Form NT 10-K requesting an extension of time to file its Form 10-K for the fiscal year ending June 30, 1998 (the "June 10-K"). See id. at ¶ 64. Pursuant to its extension request, K-tel filed the June 10-K on October 13, 1998. Kives, Kieves, Weiner, Fischer, and Koblick signed the June 10-K. See id. at ¶¶ 20a-d. According to the Amended Complaint, in the June 10-K, K-tel:
further disclosed in its consolidated balance sheet that it had shareholders' equity of $3,774,000.... K-Tel thereby represented that it was $226,000 below the NASDAQ requirements for continued listing.
Am.Compl. ¶ 66 (emphasis added). On October 19, 1998, the NASD notified K-tel that K-tel's net tangible assets had fallen below the $4 million minimum level necessary for continued listing. See id. ¶ 77. K-tel requested a hearing before the NASDAQ Listing Qualifications Panel to obtain a temporary extension to raise additional capital to meet the net tangible asset minimum. See Cambronne Aff., Ex. H at 11. K-tel did not publicly disclose either the NASD notification letter or K-tel's request for a temporary extension to meet the $4 million requirement.
On November 3, 1998, K-tel and Playboy announced their partnership for an on-line music store. See Am.Compl. ¶ 73. One week later, on November 10, K-tel announced a separate partnership with Microsoft. See id. at ¶ 74. Also, on November 16, 1998, K-tel filed the Form 10-Q for the period ending September 30, 1998 (the "September 10-Q"), reflecting negative financial results and, for the first time, publicly disclosing the NASD risk-of-delisting letter received approximately one month earlier. See id. at ¶¶ 76, 77. Numerous lawsuits alleging K-tel securities fraud followed on the heels of the filing of the September 10-Q. On February 8, 1999, the NASDAQ Hearing Panel notified K-tel that it would not delist K-tel as K-tel had "evidenced compliance with all requirements for continued listing." Form 10-Q (for the period ended December 31, 1998) at 11.
Twenty-two individual cases against K-tel have been consolidated with the above-titled class action, originally filed on November 19, 1998. Plaintiffs later filed an amended consolidated class action complaint on July 19, 1999 (after the resolution of the delisting issue) that, inter alia, commenced the class period on May 8, 1998, six months earlier than the original commencement date of November 3, 1998. See Complaint ¶ 1. Plaintiffs (the "Class") are persons and entities who purchased or otherwise acquired the common stock of K-tel between May 8, 1998 through approximately 11:36 a.m. on November 17, 1998 (the "Class Period") and who sustained a financial loss as a result of those purchases. See Am.Compl. ¶¶ 2, 13.
By extending the commencement date back to May 8, 1998, the Class Period now captures approximately 2.7 million shares of K-tel common stock sold by four Individual Defendants3 between May 8, 1998 and June 9, 1998. See Am.Compl. ¶ 79. In contrast, the original class period with the November 3, 1998 commencement date encompassed only 15,000 K-tel shares sold by Fischer on November 17, 1998 as well as 27,200 shares bought by Koblick on November 13, 1998. See id.; Cambronne Suppl.Aff., Ex. A (Koblick's December 7, 1998 Form 4). Plaintiffs allege Individual Defendants received more than $41 million dollars for K-tel stock they sold during the Class Period. See Am.Compl. ¶ 79.
In 1997, K-tel formed a marketing subsidiary (the "Subsidiary") to facilitate media-buying services for third-parties and to market products through infomercials produced by third parties. See id. at ¶ 6. According to Plaintiffs, by January 1998, K-tel "saw its asset base seriously deteriorate as a result of the Subsidiary's accumulated losses." Id. at ¶ 7. In order to conceal the losses and possible NMS delisting, K-tel, Plaintiffs argue, made misrepresentations in its March 10-Q and June 10-K.
Given the Subsidiary's accumulated losses, Plaintiffs maintain K-tel was required to take a $1.498 million write-off pursuant to Generally Accepted Accounting Procedures ("GAAP"). The Complaint charges that Defendants failed to acknowledge the write-off of "non-useable and worthless infomercials and other media items purchased by the Subsidiary." Id. at ¶ 42.
Plaintiffs allege that K-tel did not recognize the write-off as required because doing so would result in net tangible assets of less than $4 million, risking NSM delisting. See id. ¶ 6. Plaintiffs argue that, pursuant to Financial Accounting Standard ("FAS") 121, Defendants were to review assets for impairment as of March 31, 1998 and to take the $1.498 million charge to income. See id. ¶¶ 37-44, 48, 62, 63. By concealing K-tel's vulnerability to NMS delisting, Plaintiffs assert that Defendants artificially inflated the price of K-tel stock and hoped to generate interest in a private placement or secondary offering. See id. The Complaint alleges that the write-off was not fully recognized until March 31, 1999. See Defs.' Mem.Opp. at 12 n. 14.
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In re K-Tel Intern., Inc. Securities Litigation
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