Robbins v. Koger Properties, Inc.
| Decision Date | 14 July 1997 |
| Docket Number | Nos. 95-2882,95-3069,s. 95-2882 |
| Citation | 116 F.3d 1441 |
| Parties | Fed. Sec. L. Rep. P 99,487, 11 Fla. L. Weekly Fed. C 159 Lawrence ROBBINS, C. Alan Peck, George Levy, Max Bloom, Alfred Edwards, Leonard J. Goldfarb, Milton Stark, Richard Swire, Andrew Mastrangelo, Irving Metzner, Charles Carroll, Thomas Farber, Vincent R. Scala, Betty R. Ramsey, Sidney Field, Mitchell State, Abraham Galfunt, Robert I. Shane, Eva Shane, John A. Brooks, Marian J. Brooks, Leander H. Peterson, Herbert J. Zeiss, Mary Alice Johnson, Howard Perlman, Victor L. Mesaros, R. Bruce Simpson Trust, Plaintiffs-Appellees, v. KOGER PROPERTIES, INC., Ira M. Koger, Wallace F.E. Kienast, James B. Holderman, Allen R. Ransom, Defendants, Sol. H. Proctor, Sandra Proctor, Claimants, Deloitte & Touche, Defendant-Appellant, American Institute of Certified Public Accountants, Business and Securities Lawyers, Amicus for Appellant, National Association of Securities and Commercial Law Attorneys, Amicus. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Robert D. McLean, Peter D. Keisler, Rex E. Lee, Richard D. Bernstein, Carter G. Phillips, Sidley & Austin, Washington, DC, Richard E. Brodsky, Miami, FL, William L. Durden, Jacksonville, FL, for defendant-appellant.
Linda A. Klein, Gambree & Stolz, Emmet J. Bondurant, Bondurant, Mixson & Elmore, Atlanta, GA, Amicus.
George E. Ridge, Kent, Ridge & Crawford, Jacksonville, FL, Lawrence P. Kolker, Daniel W. Krasner, Wolf, Haldenstein, Adler, Freeman & Herz, Keith M. Fleischman, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Arthur Miller, Cambridge, MA, for plaintiffs-appellees.
Stanley R. Wolfe, Ruthanne Gordon, Stuart J. Guber, Berger & Montague, Philadelphia, PA, for Lawrence Robbins.
Michael R. Young, Willkie, Farr & Gallagher, New York City, for Amicus.
Tyrie A. Boyer, Boyer, Tanzler & Boyer, Jacksonville, FL, for Amicus Am. Institute of CPA.
Appeals from the United States District Court for the Middle District of Florida.
Before COX, Circuit Judge, HILL, Senior Circuit Judge, and VINING *, Senior District Judge.
Deloitte and Touche challenges the district court's denial of its Fed.R.Civ.P. 50(a) motion for judgment as a matter of law. The district court held that plaintiffs offered sufficient proof of loss causation to support their Rule 10b-5 claim. We reverse and render judgment in favor of Deloitte and Touche.
Deloitte and Touche ("Deloitte"), an accounting firm, conducted audits of the 1988, 1989, and 1990 financial statements of Koger Properties, Inc. ("KPI"), a commercial real estate construction and management company listed on the New York Stock Exchange. KPI included these audited financial statements in its 1989 and 1990 Annual Reports and in its 1989 and 1990 Form 10-K filings with the Securities and Exchange Commission ("SEC"). In both the Annual Reports and the Form 10-K filings, Deloitte represented that, in its opinion, the financial statements presented fairly, in all material respects, the financial position of KPI in accordance with generally accepted accounting principles (GAAP).
The information audited by Deloitte included cash flow figures calculated by KPI for its fiscal years 1988, 1989, and 1990. KPI calculated its cash flow by subtracting from its operating revenues costs related to administration, rental property maintenance, interest, and income tax. KPI generated operating revenue both by leasing properties it developed and by selling such properties.
In the course of its audits, Deloitte noted problems with the accounting methods utilized by KPI to calculate cash flow. Specifically, Deloitte and KPI disagreed at times about whether certain costs should be treated as expenses in a particular year or should be capitalized. 2
For example, in auditing KPI's fiscal year 1988 statement, Deloitte informed KPI that its capitalization of interest payments was in violation of GAAP. Deloitte initially insisted that KPI record the amount of the discovered overcapitalizations in the fiscal year 1988 financial statement. However, Deloitte ultimately approved KPI's fiscal year 1988 financial statement without a full adjustment for the interest overcapitalization. In addition, throughout the 1989 and 1990 audits, Deloitte repeatedly identified discrepancies between KPI's capitalization of "lease-up" costs and GAAP. Nevertheless, Deloitte approved the financial statements as in accordance with GAAP without requiring a correction. Plaintiffs' expert identified other instances of Deloitte improperly approving KPI's capitalization of indirect property costs. In the end, all of these overcapitalizations increased KPI's apparent cash flow.
KPI derived a significant amount of its 1989 and 1990 operating revenue from sales of developed commercial properties to Koger Equity ("KE"). KPI owned a twenty percent interest in KE, and Ira Koger served as chairman and CEO of both KPI and KE. Plaintiffs offered testimony that reporting gains from these sales as operating revenue violated GAAP. In 1991, the SEC required KPI to restate these gains as financing activities, not as operating revenue. These misstated revenues, like the overcapitalizations, increased KPI's apparent cash flow in 1989 and 1990.
During the 1990 audit, Michael Goodbread was a partner at Deloitte with responsibility for the KPI audit. Goodbread owned KPI stock during part of the 1990 audit. This ownership was a violation of generally accepted accounting standards (GAAS). Goodbread did not work at Deloitte during the 1989 audit.
KPI consistently paid nearly all of its cash flow out in the form of quarterly stockholder dividends. Thus, by overstating its cash flow, KPI could pay its shareholders higher dividends. The high dividends were one of the forces behind KPI's stock price. Deloitte, however, never stated that KPI's dividend could continue to be paid. (R.30 at 99.)
According to KPI's 1990 Form 10-K, although the percentage of revenues generated from its leasing operations steadily declined from 1988 through 1990, KPI's quarterly dividend increased throughout this period from $.625 to $.70 per share. Thus, the dividend was increasingly sustained by sales of real estate and was a non-taxable return of capital. Concomitantly, the price of KPI stock steadily declined from 1988 to 1990, from a high of $27.38 in the first quarter of 1988 to $21.13 on June 25, 1990. In the face of a rising dividend, this decrease in stock price meant that KPI's dividend yield rose substantially, from around 10% in July 1989 to over 15% in September 1990. Moreover, this 15% yield was completely non-taxable.
On September 28, 1990, Standard and Poor's downgraded KPI's credit rating, stating that "[t]he company's continued increases in debt and declining equity base are concerns in light of the deteriorating real estate environment." (DX247-C.)
With rumors of a dividend cut swirling, on September 30, 1990, KPI's board of directors decided to cut KPI's future quarterly dividend from seventy cents per share to twenty-five cents per share. The cut took effect after KPI paid a seventy cent dividend it had declared on August 7, 1990. As revealed in the minutes of the board meeting, the board was motivated to reduce its dividend, a form of cash outflow, by a perceived decrease in the availability of future real estate financing. Such financing was necessary if KPI was to continue to sell developed properties and pay the dividend those sales supported. Moreover, the board expressed concern that the current dividend was hard to justify given the recent declines in KPI's stock price.
The dividend cut was announced officially in a press release on October 1, 1990. The press release stated that "[t]here has been no decline in the cash flow of Koger Properties." (DX 253.) Following this announcement, KPI's stock price fell to an average price of $8.20 between October 1 and October 5, down from an average price of $18.25 between September 11 and September 17, a difference of $10.05. It was not until sometime in 1992, according to plaintiffs' expert, that it was discovered that the audited financial statements were false. (R.30 at 48, 83.) Following this discovery, KPI charged an adjustment of over $100,000,000 to its balance sheet. (Id.)
Lawrence Robbins filed this action on October 1, 1990, against KPI and several individual defendants seeking certification of a plaintiff class under Fed.R.Civ.P. 23 and damages under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. In January 1991, plaintiff filed an amended complaint adding more named plaintiffs and including Deloitte as an additional defendant. In February 1993, the district court certified a plaintiff class composed of all purchasers of KPI common stock from July 5, 1989, through and including October 1, 1990. KPI and the individual defendants were later dismissed at plaintiffs' request, leaving Deloitte as the sole defendant.
During a nineteen day trial in February and March of 1995, plaintiffs presented their claims to a jury. Plaintiffs claimed that Goodbread's ownership of KPI stock during the 1990 audit impaired Deloitte's ability to act as an independent auditor and that Deloitte, in each of the audits in question, approved capitalizations and statements of operating revenue that it knew were in violation of GAAP. (R.15-352 at 3-5; R.43 at 182-84.) Plaintiffs claimed that Deloitte misled investors into thinking that KPI's cash flow was sufficient to support its dividend. (R.15-352 at 5.) As a result, members of the plaintiff class suffered damage when they purchased KPI stock during the class period because the price of the stock was "artificially inflated." (R.15-352 at 6; R.2-41 at 11; R.43 at 187.)
As proof of the amount of artificial inflation, plaintiffs offered the testimony of its damages expert. To demonstrate...
To continue reading
Request your trial
-
Cook v. Campbell, Civil Action No. 2:01cv1425-ID.
... ... are former employees of Central Alabama Home Health Services, Inc. ("Central Alabama"), who during their employment participated in Central ... See Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir.1997); Anderson ... ...
-
In re Intelligroup Securities Litigation
... ... In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir.2002) (finding that judicial ... Petren Res. Corp., 892 F.2d 680 (7th Cir. 1990); Robbins v. Koger Properties, Inc., 116 F.3d 1441 (11th Cir.1997) ... ...
-
Apa Excelsior III, L.P. v. Windley
... ... (collectively referred to as the "Patricof Plaintiffs"); Humana, Inc. ("Humana"); and Fostin Capital Associates II LP ("Fostin Capital") ... (Defs.' Ex. O) at 146-48.) As a result of these concerns, Tom Robbins became the Companies' President and CEO on about November 30, 1998 ... Koger Prop., Inc., 116 F.3d 1441, 1447 (11th Cir.1997); Ross v. Bank South, ... ...
-
Sturm v. Marriott Marquis Corp.
... ... corporation and is one of the largest owners of lodging properties in the world. Marriott International Corporation manages hotels. It has a ... Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir.1997); Bruschi ... ...
-
The Land Of The Loss: The Supreme Court Will Rule On Loss Causation
...apply a stricter loss causation standard than that permitted by the Eighth and Ninth Circuits. In Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1448 (11th Cir. 1997), class plaintiffs won a jury verdict for damages based on losses sustained as a result in a drop in stock price following......
-
Securities fraud litigation--lost in causation: investors not entitled to presumption of loss causation in fraud-on-the-market cases--Dura Pharmaceuticals, Inc. v. Broudo, 125 S. CT. 1627 (2005).
...Knapp v. Ernst & Whinney, 90 F.3d 1431, 1438 (9th Cir. 1996) (following price inflation theory); Robbins v. Koger Prop., Inc., 116 F.3d 1441, 1447-48 (11th Cir. 1997) (requiring causal connection); see also Binder, 184 F.3d at (31) See Fox, supra note 28, at 517 (discussing cases requir......