In re Sahlen & Associates, Inc. Securities Lit.

Citation773 F. Supp. 342
Decision Date10 July 1991
Docket NumberNo. 89-6308-CIV-WMH.,89-6308-CIV-WMH.
PartiesIn re SAHLEN & ASSOCIATES, INC. SECURITIES LITIGATION.
CourtU.S. District Court — Southern District of Florida

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Laz L. Schneider, Sherr Tiballi Fayne & Schneider, Fort Lauderdale, Fla., for plaintiffs Feld, Ehrenkrantz.

Atlee W. Wampler, III, Wampler, Buchanan & Breen, Miami, Fla., for plaintiffs.

Jan Douglas Atlas, Atlas Pearlman & Trop, Fort Lauderdale, Fla., for defendant Logal.

Lewis N. Brown, Gilbride Heller & Brown, Miami, Fla., Alan Geolot, Sidley & Austin, Washington, D.C., for KPMG Peat Marwick.

Jane W. Moscowitz, Jay Starkman, Steel Hector & Davis, Miami, Fla., for defendant Bodden.

Marvin Pickholz, Paul Murphy, David Pollack, Mindy Pallot, Stroock & Stroock & Lavan, Miami, Fla., for defendant Sahlen, Jr.

James H. Schropp, Henry A. Hubschman, Jonathan M. Jacobs, Fried Frank Harris Shriver & Jacobson, Washington, D.C., for defendants Burgoyne, Pledger, Gellman, Schaefer & Wallace.

MEMORANDUM & ORDER

HOEVELER, District Judge.

THIS CAUSE comes before the Court on numerous motions to dismiss filed by various Defendants in six of the consolidated actions bearing the master file number 89-6308-CIV-HOEVELER.1

FACTUAL BACKGROUND

Prior to 1986, Sahlen & Associates, Inc. ("SAI" or "the Company"), a Delaware corporation with its principal place of business in Deerfield Beach, Florida, was a relatively small company primarily involved in providing private investigative services to the insurance industry, attorneys and other corporate clients. In 1986, however, SAI undertook an aggressive expansion campaign geared toward offering a broader range of security-related services in a wider range of locations. In order to carry out its plan for massive growth, SAI acquired several security-related businesses, obtaining funding essentially from the investing public through both private and public security offerings. SAI ultimately became one of the largest uniformed security guard and private investigative service companies in the world.

It was not long, however, before the sweet SAI success turned sour. On April 12, 1989, the Company Board of Directors announced that the Security Exchange Commission ("SEC") had begun an informal investigation into certain revenue recognition and accounting practices of the Company. In conjunction with this investigation, the Board launched a probe of its own and decided to withdraw its proposed public offering of securities and postpone the registration of common shares held by shareholders pending completion of the investigations. It took the Company's investigating committee merely a day to discover that SAI's financial statements contained extensive overstatements of the accounts receivable and revenues, ultimately requiring SAI to "writedown" approximately $45 million in its accounts receivable.2 Shortly thereafter, the Board dismissed its top executive officer, Harold F. Sahlen, and three Executive Vice Presidents — Lawrence E.C. Bodden, Aarif Dahod and Nelson H. Logal — for their alleged misconduct in connection with a scheme to manipulate profits and overstate assets. Moreover, as a result of SAI's disclosures, KPMG Peat Marwick Main & Company ("PMM")3, the public accounting firm which served as an independent auditor for SAI, withdrew its previous audit opinions and interim review letters for fiscal years 1986, 1987 and 1988, and informed stockholders and the investing public that they should not rely on these statements. As would be expected, the price of SAI common stock, in reaction to these disclosures, plunged dramatically. The stock is now virtually worthless. On May 30, 1989, SAI filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Following the Board's announcements beginning April 12, 1989, numerous corporate and individual investors who had purchased SAI securities filed suit against the Company4, various officers and directors referred to as the "Individual Defendants"5, PMM and McKinley, Allsopp & Company ("McKinley Allsopp"), a broker-dealer that participated in a 1987 private placement of SAI securities. On June 11, 1990, in response to the myriad actions which had been and were anticipated to be filed, the undersigned entered an Order ("Pretrial Order No. 1") consolidating the various class-action and individual cases for pretrial purposes. While differing in some respects, the complaints before the Court, bearing Master File No. 89-6308, allege that the defendants conspired in a grand scheme (known as "the Project") to falsely portray the true financial condition of SAI, thereby inducing the plaintiffs to invest in the Company. Plaintiffs assert that SAI employees, in furtherance of this deceptive scheme, inflated billings by writing up false invoices for work not actually done, forged clients' names, tampered with confirmation letters sent out by the accountants, and implemented a computer software program reflecting the spurious information. In addition, Plaintiffs complain that the defendants circulated false and misleading statements concerning SAI's overinflated accounts receivable and revenues in the reports and financial statements of the Company and in press releases in order to produce the illusion that the Company was rapidly growing and highly successful and to entice the investing public into providing the Company with capital for its rapid expansion. Moreover, Plaintiffs contend, Defendants were motivated to conceal the true financial condition of SAI in order to protect their management positions with the Company, hide their own misconduct and mismanagement, and enhance the value of their own stock.

These complaints before the Court assert a panoply of claims under both state and federal law, including (1) violations of § 10(b) and § 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1990), (2) violations of § 12(2) and § 15 of the Securities Act of 1933, 15 U.S.C. §§ 77l(2) and 77o, (3) aiding and abetting federal securities violations, (4) violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO") 18 U.S.C. § 1962(a), (b), (c), and (d), (5) common law fraud and deceit, (6) negligent and reckless misrepresentation, (7) ordinary and gross negligence, (8) violations of § 517.211 and § 517.301 of the Florida Securities and Investor Protection Act ("FSIPA"), Fla.Stat. §§ 517.211 and 517.301, and (9) common law conspiracy. Defendants move to dismiss the various counts of the complaints pursuant to Rule 12(b)(6) and Rule 9(b) of the Federal Rules of Civil Procedure and for lack of pendent jurisdiction.

It is well-established that a "complaint should not be dismissed for failure to state a claim unless 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, 45-56, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84 (1957). Moreover, a court must assume all allegations of a complaint are true for purposes of a motion to dismiss. St. Joseph's Hosp., Inc. v. Hospital Corp. of America, 795 F.2d 948, 953 (11th Cir.1986); Stone Mountain Game Ranch, Inc. v. Hunt, 746 F.2d 761, 763 n. 4 (11th Cir.1984). It is with this standard in mind that the Court proceeds.

DISCUSSION
I. § 10(b) OF THE SECURITIES EXCHANGE ACT OF 1934

In each of the cases at issue, Plaintiffs have brought a claim against all Defendants for violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),6 and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1990),7 alleging that the defendants intentionally made misrepresentations or omissions of material fact on which Plaintiffs detrimentally relied. In order to state a cause of action under § 10(b) and Rule 10b-5, a plaintiff must allege: (1) a misstatement or omission (2) of a material fact (3) made with scienter, (4) on which the plaintiff relied (5) that proximately caused the plaintiff's injury. Ross v. Bank South, N.A., 885 F.2d 723, 728 (11th Cir.1989) (en banc), cert. denied, ___ U.S. ___, 110 S.Ct. 1924, 109 L.Ed.2d 287 (1990); Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir.1987). Defendants move to dismiss those counts of the complaints asserting federal securities fraud, arguing, among other contentions, that Plaintiffs have failed to adequately set forth reliance, scienter and loss causation.8 Each of these arguments will be considered in light of Rule 9(b)'s requirement of pleading fraud with particularity.

Rule 9(b) provides that when fraud is pled in federal court, "the circumstances constituting fraud ... shall be stated with particularity," but that allegations concerning a defendant's state of mind "may be averred generally." Fed.R.Civ.P. 9(b). Pleading fraud with greater specificity than is normally required by the federal rules is necessary in order to (1) provide defendants with sufficient notice of the acts of which the plaintiff complains to enable them to frame a response, (2) prevent fishing expeditions to uncover unknown wrongs and (3) protect defendants from unfounded accusations of immoral and otherwise wrongful conduct. Knight v. E.F. Hutton and Co., Inc., 750 F.Supp. 1109, 1114 (M.D.Fla.1990). This rule does not abrogate notice pleading under Rule 8 of the Federal Rules of Civil Procedure, however. "A court considering a motion to dismiss for failure to plead fraud with particularity should always be careful to harmonize the directives of rule 9(b) with the broader policy of notice pleading." Friedlander v. Nims, 755 F.2d 810, 813 n. 3 (11th Cir.1985). See also Durham v. Business Management Associates, 847 F.2d 1505, 1511 (11th Cir.1988). Therefore, while mere conclusory allegations of fraud will not satisfy Rule 9(b),...

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