Alaska Elec. Pension Fund v. Adecco S.A.

• Decision Date: 16 May 2005
• Docket Number: No. CIV. 04CV0129L(JFS).,CIV. 04CV0129L(JFS).
• Citation: 371 F.Supp.2d 1203
• Parties: ALASKA ELECTRICAL PENSION FUND, On Behalf of Itself and All Others Similarly Situated, Plaintiffs, v. ADECCO S.A.; John Bowmer; Jerome Caille; and Felix A. Weber, Defendants. In re Adecco S.A. Securities Litigation This Document Relates to: All Actions
• Court: U.S. District Court — Southern District of California

371 F.Supp.2d 1203

ALASKA ELECTRICAL PENSION FUND, On Behalf of Itself and All Others Similarly Situated, Plaintiffs, v. ADECCO S.A.; John Bowmer; Jerome Caille; and Felix A. Weber, Defendants.

In re Adecco S.A. Securities Litigation

This Document Relates to: All Actions

No. CIV. 04CV0129L(JFS).

United States District Court, S.D. California.

May 16, 2005.

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Jeffrey W. Lawrence, William S. Lerach, Darren Jay Robbins, Lerach, Coughlin, Stoia, Geller, Rudman and Robbins, San Diego, CA, Jeffrey W. Lawrence, Milberg, Weiss, Bershad, Hynes and Lerach, San Francisco, CA, Peter D. Bull, Bull and Lifshitz, Samuel H. Rudman, Cauley, Geller, Boman and Rudman, Melville, NY, Catherine A. Torrell, Cohen, Milstein, Hausfeld and Toll, James E. Tullman, Weiss and Yourman, Arthur N. Abbey, Abbey and Ellis, New York City, Robert S. Gans, Berstein, Litowitz, Berger and Grossmann, San Diego, CA, for Plaintiffs.

Laurie B. Smilan, Latham & Watkins, Reston, VA, Julia A. Parry, Latham & Watkins LLP, San Diego, CA, for Defendants.

ORDER: (1) GRANTING MOTION TO DISMISS CONSOLIDATED COMPLAINT; (2) DISMISSING CONSOLIDATED COMPLAINT WITHOUT PREJUDICE

LORENZ, District Judge.

On March 14, 2005, this matter came on regularly for a hearing on Defendants' Motion to Dismiss the Consolidated Complaint. Scott H. Saham of Lerach Coughlin Stoia Geller Rudman & Robbins, LLP appeared for Plaintiffs. Laurie B. Smilan of Latham & Watkins appeared for the Defendants. At the conclusion of the hearing, the Court requested the parties to submit supplemental briefing.¹

Having carefully reviewed the parties' briefs, oral argument, and applicable law, the Court finds the Consolidated Complaint does not meet the pleading requirements under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 78u-4(b)(1) and (2), and therefore GRANTS Defendants' motion to dismiss. This dismissal, however, is without prejudice and Plaintiffs have 45 days from the date this order is stamped "Filed" to file an amended complaint.

BACKGROUND

Plaintiffs filed this action under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78(t)(a), and Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. Plaintiffs allege violations of the statute and regulation on behalf of a class of investors who purchased Defendant Adecco S.A. ("Adecco" or "the Company") stock between March 16, 2000 to January 9, 2004 (the "Class Period"). (Compl. ¶ 1.) Defendants are Adecco and four of its officers and directors. Defendant John P. Bowmer was Chairman of Adecco from February 2002 through the end of the Class Period and previously was CEO of the Adecco Group since its inception in 1996. Id. ¶ 30. Defendant Jerome Caille has been the CEO of Adecco since March 2002, and prior to that served as President of the Adecco Staffing division Id. ¶ 31. Defendant Felix A. Weber was CFO of Adecco from 1998 until 2004. Id. ¶ 32. Defendant Klaus J. Jacobs is one of the Company's founders and currently co-Chairman of the Board of Directors of Adecco. Id. ¶¶ 33, 135.

Adecco is a Swiss company primarily engaged in providing personnel services to companies and industry worldwide. Id. ¶¶ 1, 12, 29. Adecco provides these services by contract to businesses located throughout North America, Europe, Asia Pacific and Latin America. Id. ¶¶ 1, 29. The Company's North American ("Adecco North America") operations accounted for approximately 24% of total revenue at Adecco in 2003. Id. ¶¶ 18, 29. The Company's stock trades on the SWX Swiss Stock Exchange and is listed on Euronext Premier Marche. Id. ¶ 12. Adecco's stock is also traded as American Depositary Shares on the New York Stock Exchange. Id.

In March 2000, Adecco acquired Olsten Corporation, a U.S. company, primarily for its more advanced technology. Id. ¶¶ 13, 43. Adecco then terminated more than 600 of its most senior and experienced North American executives, regional managers, and district managers in favor of Olsten's less-qualified senior managers and executives. Id. ¶ 43. After the Olsten takeover, the Company discovered it would be unable to collect millions of dollars in receivables from Olsten's customers, who had gone bankrupt or who had unresolved billing disputes. Id. ¶¶ 42-50. According to Plaintiffs, Adecco should have written off the bad receivables, which totaled at least in the tens, if not hundreds, of millions of dollars. Id. ¶ 44. Another problem facing Adecco North America after the takeover was its inability and failure to match customer payments to proper invoices. Id. ¶¶ 46, 47. When this occurred, many customers refused to pay new invoices. Id. ¶ 47.

The combination of millions of dollars in uncollectible debt and the amount that customers refused to pay resulted in hundreds of millions of dollars of outstanding receivables on Adecco's books during 2000 and 2001. Id. ¶ 48. In order to conceal the amount of bad debt it acquired in the Olsten merger and inflate the price of Adecco's securities, Defendants misrepresented and omitted material facts in forms filed with the SEC and disseminated in press releases and conference calls. Id. ¶¶ 115-17. Plaintiffs maintain Defendants engaged in a variety of accounting shenanigans and failed to properly take allowances for doubtful accounts in its 2000 and 2001 financial statements. Id. ¶¶ 115, 119, 121-23. In particular, Adecco North America violated generally accepted accounting principles ("GAAP") by applying new moneys received from customers to old outstanding invoices. Id. ¶ 53. Plaintiffs also aver that Adecco North America manipulated its financial statements by billing customers at incorrect rates, improperly classifying its workers, engaging in State Unemployment Tax Act ("SUTA") dumping, and delaying its payments to vendors. Id. ¶¶ 40, 59-63, 69-70.

The outstanding and uncollectible receivables remained on Adecco's books until its financial statement for year-end 2002, when Adecco began writing off the receivables that had been on its books for more than 90 days. Id. ¶ 50. Prior to that time, some receivables had remained on Adecco's books more for two years. Id.

Adecco switched auditors from Arthur Andersen to Ernst & Young, LLP in late 2002. Id. ¶ 57. In early 2003, Ernst & Young warned Defendants they needed to correct the misallocation of current cash receipts by year-end 2003. Id. ¶¶ 36, 57. However, Defendants continued to engage in this practice until it learned Ernst & Young would not allow the lead auditor Mike Sills to sign off on the accounting scheme. Id.

On January 12, 2004, Adecco issued a press released entitled "Adecco S.A. Delays Announcement of FY 2003 Audited Results." Id. ¶¶ 3, 107. The press release stated in part:

Adecco S.A. announced that it does not expect the audit of its consolidated financial statements for the 2003 fiscal year, ended on December 28, 2003, to be completed by Adecco's auditors, by the previously announced release date of February 4, 2004.

The reasons of the delay in completion of the audit include:

— The identification of material weaknesses in internal controls in the Company's North American operations of Adecco Staffing

— The resolution of possible accounting, control and compliance issues in the Company's operations in certain countries

— The completion of the Company's efforts to address these matters and determine their effect on the Company's consolidated financial statements.

In this regard an independent Counsel has been appointed by the Audit & Finance Committee of the Company's Board of Directors to conduct an investigation.

The Company is not yet able to predict when the 2003 audit of its consolidated financial statements will be completed.

Id. Following this news, Adecco's stock dropped from almost $17 per share to as low as $10 per share. Id. ¶ 4. The SWX Swiss Stock Exchange, SEC, and United States Department of Justice initiated investigations into possible violations of the law. Id. ¶¶ 5, 15, 109, 111.

Several plaintiffs filed securities fraud class actions against Adecco shortly after the January 12 announcement, contending the Company would have to restate its FY 2000-2003 results to eliminate millions in improperly-recorded revenues. The cases were filed in this district and in the Southern District of New York. The New York cases were transferred to this district, and all actions consolidated.

On June 1, 2004, Adecco released its 2003 Annual Report. (Id. ¶ 114; Parry Decl. Ex. H.) Adecco announced in this report that its "accounts were signed by [the] auditors with no qualification, no restatement of prior year results and with no evidence of material irregularities." (Parry Decl. Ex. H at 599.) Plaintiffs allege that Adecco's 2003 Annual Report conceded that problems in controls had existed and that it had not just been overcautiousness on the part of the Board or the Company's outside officers. (Compl. ¶ 114.) Defendant Bowmer hoped that the "unfortunate episode" was ending, and stated that Adecco had "taken a number of significant steps to reinforce our audit and control functions throughout the Company." Id. In the report, Defendant Caille stated that Adecco had "used this opportunity to review [its] operations and systems in the U.S. and drive process efficiencies as well as strengthen[] ... internal controls." Id.

On September 13, 2004, Plaintiffs filed the instant Consolidated Complaint. All Defendants except Defendant Jacobs, who had not yet been served with the Complaint, filed a motion to dismiss.

APPLICABLE LAW REGARDING MOTIONS TO DISMISS SECURITIES CLASS ACTIONS

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). Dismissal of a claim under this rule is appropriate only where "it appears beyond doubt that the plaintiff can prove...