380544 Canada, Inc. v. Aspen Technology, Inc.
| Decision Date | 18 March 2008 |
| Docket Number | No. 07 Civ. 1204(JFK).,07 Civ. 1204(JFK). |
| Citation | 544 F.Supp.2d 199 |
| Parties | 380544 CANADA, INC., Wayne Sim, and Salvatore Clave, Plaintiffs, v. ASPEN TECHNOLOGY, INC, Lawrence Evans, David McQullin, and Lisa Zappala, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Seeger Weiss, LLP, of Counsel: Eric Chaffin, Esq., New York, NY, for the Plaintiffs.
Skadden ARPS Slate Meagher & Flomm, LLP, of Counsel: Kurt Hemr, Esq., Boston, MA, for Defendant Aspen Technology, Inc.
Foley Hoag, LLP, of Counsel: Nicholas Theodorou, Esq., Boston, MA, for Defendant Lawrence Evans.
DLA Piper US, LLP, of Counsel: Bruce Falby, Esq., Sonal Patel, Esq., Boston, MA, for Defendant. David McQuillin.
Goodwin Proctor, LLP, of Counsel: John Falvey, Esq., Boston, MA, for Defendant Lisa Zappala.
Plaintiffs 380544 Canada, Inc., Wayne Sim, and Salvatore Clave (collectively, the "Plaintiffs") brought this action against defendant Aspen Technology, Inc. ("Aspen") and individual defendants Lisa Zappala, Lawrence Evans, and David McQuillin (collectively, the "Individual Defendants"), who are former high-ranking officers of Aspen, alleging securities fraud in violation of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act"), as well as common law fraud. Plaintiffs' claims arise from the defendants' alleged false or misleading statements in both public statements and private communications with the plaintiffs regarding Aspen's revenues and accounting controls. Plaintiffs allege that, as a result of the defendants' fraudulent portrayal of Aspen's financial health and the efficacy of its accounting practices, Plaintiffs were induced to enter into a Securities Purchase Agreement, under which they bought approximately $6.8 million of Aspen's stock. Plaintiffs allege that, when the defendants' fraud was exposed, Aspen's stock price plummeted, resulting in Plaintiffs' financial losses.
Defendants Zappala and Evans have moved, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss Plaintiffs' federal securities fraud claims as time barred. All three Individual Defendants have moved, pursuant to Rule 12(b)(6), to dismiss the federal securities fraud claims and related common law claims for failure to satisfy the heightened pleading requirements for securities fraud under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4. In addition, the Individual Defendants have moved, pursuant to Rule 12(b)(6), to dismiss the Cross Claims that were filed against them by Plaintiffs, for contribution on Aspen's Counterclaim.
For the reasons set forth below, Defendants Zappala's and Evans' motions to dismiss the Complaint are granted, with prejudice as to the federal securities fraud claims but with leave to Plaintiffs to replead the common law fraud claims. Defendant McQuillin's motion to dismiss is in part granted and in part denied. The three Individual Defendants' motions to dismiss Plaintiffs' Cross Claims are granted, and the Cross Claims are dismissed with prejudice.
The following facts are taken from the Complaint, documents referenced in or incorporated by the Complaint, and facts of which the Court may take judicial notice.1 The Parties
Aspen Technologies ("Aspen") is a provider of process engineering software, organized under Delaware law, with a principal place of business in Cambridge, Massachusetts, and publically traded on the NASDAQ. Compl. ¶ 18. Aspen sells its software, and related maintenance and consulting services, primarily to companies in the petroleum, chemical, and pharmaceutical industries. Id. It is a large multinational corporation with sales offices in 33 cities (twelve in the United States, and 21 internationally); a total of 2200 full-time employees; and gross annual revenues in excess of $320 million. Id. ¶ 53 n. 3; Decl. of Patrick J. Vallely in Support of Def. Lawrence B. Evans' Motion to Dismiss ("Vallely Decl."), Ex. C, at 12, 13, 25.
The Individual Defendants are former high-ranking officers and/or directors of Aspen. Specifically, David McQuillin ("McQuillin") was Aspen's Executive Vice President of Worldwide Sales and Marketing from 1997 to 2002, Co-Chief Operating Officer from 2001 to 2002, and President and CEO from 2002 until his resignation on November 24, 2004. Compl. ¶ 19. Lawrence Evans ("Evans") was Aspen's founder, as well as its Board Chairman and CEO until October 2002, when he stepped down as CEO and continued to serve as Board Chairman. Id. ¶ 20. Lisa Zappala ("Zappala") was Aspen's Senior Vice President and Chief Financial Officer ("CFO") from 1998 until her resignation as CFO in July 2003. Id. ¶ 21. Zappala continued to serve as Senior VP of Finance until her full resignation in December 2004. Id.
In 2001, Aspen began negotiations with AEAT, a British software company, regarding Aspen's potential purchase of Hyprotech, a software subsidiary of AEAT. Id. ¶¶ 26, 29. Plaintiff Wayne Sim ("Sim"), a Canadian citizen and resident, was Hyprotech's founder and CEO. Id. ¶ 15. Plaintiff Salvador Calve, a Spanish citizen residing in Canada, was Hyprotech's Chief Operating Officer. Id. ¶ 16.
In order to raise cash and finance its acquisition of Hyprotech, Aspen recruited investors to purchase approximately $50 million of Aspen's stock via a private placement. Sim and Clave were among those investors. Id. ¶¶ 30-32. From May 2001 through April 2002, prior to the plaintiffs' purchase of Aspen's stock under the private placement agreement, several telephonic and in-person meetings took place in which Aspen's executives made various representations to Sim and Clave regarding Aspen's finances, operations, and internal accounting controls. Id. ¶ 31. On May 9, 2002, Sim and Clave entered into a private placement Securities Purchase Agreement (the "SPA") with Aspen. Pursuant to the SPA, Sim, acting through his wholly owned company, 380544 Canada, Inc., purchased 550,000 shares of Aspen's common stock and warrants for $6.6 million. Clave purchased 16,665 shares for approximately $200,000. Under the SPA, investors — including the plaintiffs — purchased a total of over 4.1 million shares of Aspen's stock for approximately $50 million in cash. On May 10, 2002, Aspen announced its acquisition of Hyprotech. Id. ¶¶ 30, 32, 35-37.
The SPA provided, among other things, that Aspen's financial transactions were recorded and its public filings with the SEC prepared in conformity with generally accepted accounting principles ("GAAP"). Id. ¶ 34. The SPA was signed by Individual Defendant Zappala as Aspen's CFO. Id. ¶ 159.
After the execution of the SPA, both Sim and Clave were hired by Aspen. From June 2002 until his resignation in August 2004, Sim acted variously as Aspen's Chief Product Officer and Senior Vice President of Sales. Id. ¶ 15. From June 2002 to October 2004, Clave acted variously as Aspen's Vice President of Sales for the Engineering Business Unit and Senior Vice President of Sales Operations. Id. ¶ 16.
On October 27, 2004, Aspen announced that its Audit Committee had undertaken a review of the accounting for software licensing and service agreements and would be unable to release its first quarter Financials.2 On October 29, 2004, Aspen announced that federal prosecutors had launched an investigation of Aspen's accounting practices. On November 18, 2004, Aspen announced that it had received notice from the NASDAQ that it was subject to de-listing due to its failure to file its Form 10-Q quarterly report for the quarter ended September 30, 2004.
On November 24, 2004, Aspen issued a press release announcing (I) that the company would be forced to restate its Financials for fiscal years 2000 through 2004 and, thus (ii) those financial statements could not be relied on. On January 31, 2005, Aspen announced that the Audit Committee's review had identified sixteen separate material transactions for the fiscal years 2002 through 2004, that were improperly accounted for. Id. ¶ 8.
On March 15, 2005, Aspen filed an Amended Form 10-K for the fiscal year ending June 30, 2004 (the "Amended Form 10-K"). In the Amended Form 10-K, Aspen advised that its annual and quarterly reports filed with the SEC for the fiscal years 1999 through 2004 could not be relied upon. The Amended Form 10-K also restated Aspen's pre-tax and after-tax earnings for each of the six fiscal years, from 1999 through 2004. The restatements revealed that Aspen had overstated its net (or after-tax) income in 2002 (by 1.4%), 2003 (by 14.6%) and 2004 (by 24.4%); had understated its net income in 1999 (by 24.6%) and 2001 (by 44.7%); and that the difference between the reported and restated income in 2000 was not material. Id. ¶¶ 9, 38-39.
The accounting improprieties that forced the restatement stemmed from Aspen's improper recognition of revenue from software licensing and service agreements. Specifically, Aspen admitted in the Amended Form 10-K that it improperly recognized revenue by: (I) entering into side agreements that altered the terms of its sales arrangements, thus allowing Aspen to recognize revenue prematurely; (ii) recording consignment sales as revenue, when in fact such sales were subject to the risk of return by the consignees; (hi) recording revenue from software licenses before it had substantially performed under the sales agreements; and (iv) recording revenue of maintenance services before it had actually performed those services. Id. ¶ 40. In the Amended Form 10-K, Aspen conceded that these accounting improprieties were all material violations of GAAP that required retroactive restatement. Id.
As a result of Aspen's negative announcements and, finally, the issuance of the Amended Form 10-K, Aspen's stock price declined. In...
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