Bamberg v. Sg Cowen, CIV.A.02-CV-10304-PB

• Decision Date: 09 December 2002
• Docket Number: No. CIV.A.02-CV-10304-PB,No. CIV.A.02-CV-10367-PB.,CIV.A.02-CV-10304-PB,CIV.A.02-CV-10367-PB.
• Citation: 236 F.Supp.2d 79
• Parties: Paul G. BAMBERG, et al., Plaintiffs, v. SG COWEN Defendant. Janet Baker, et al., Plaintiffs, v. SG Cowen Defendant. Janet Baker, et al., Plaintiffs, v. KPMG Singapore Defendant.
• Court: U.S. District Court — District of Massachusetts

Page 79

236 F.Supp.2d 79

Paul G. BAMBERG, et al., Plaintiffs, v. SG COWEN Defendant.

Janet Baker, et al., Plaintiffs, v. SG Cowen Defendant.

Janet Baker, et al., Plaintiffs, v. KPMG Singapore Defendant.

No. CIV.A.02-CV-10304-PB

No. CIV.A.02-CV-10367-PB.

United States District Court, D. Massachusetts.

December 9, 2002.

COPYRIGHT MATERIAL OMITTED

Richard E. Bennett, Jack R. Pirozzolo, Willcox, Pirozzolo & McCarthy, Boston, MA, Arthur G. Connolly, III, Connolly, Bove, Lodge & Hutz, Wilmington, DE, James J. Nicklaus, Willcox, Pirozzolo & McCarthy Professional Corporation, Kenneth J. Fishman, Fishman, Ankner & Horstman, LLP, Boston, MA, Kurt F. Gwynne, Reed Smith LLP, John G. Harris, Wilmington, DE, Terence K. Ankner, Fishman, Fishman, Ankner & Horstman, LLP, Boston, MA, Karen C. Dyer, Boies, Schiller & Flexner LLP, Orlando, FL, Robert A. Nicholas, Michael T. Scott, Alan K. Cotler, Sean M. Halpin, Tracy Zurzolo-Frisch, Joan A. Yue, Reed Smith, LLP, Philadelphia, PA, for Plaintiffs.

Anthony M. Feeherry, Goodwin Procter LLP, Boston, MA, Susan E. Kaufman, Heiman, Aber, Goldlust & Baker, Wilmington, DE, James O. Fleckner, Hutchins, James S. Dittmar, Wheeler & Dittmar, Douglas H. Meal, Emily F. Klineman, Ropes & Gray, Pamela E. Berman, Schnader, Harrison, Goldstein & Manello, LLP, Boston, MA, Daniel Waxman, Eric Rieder, Bryan Cave LLP, New York City, Nelson Callahan, John A.D. Gilmore, Hill & Barlow, Boston, MA, Stephen E. Jenkins, Ashby & Geddes, Wilmington, DE, Douglas F. MacLean, Latham & Watkins, Newton, MA, Peter W. Devereaux, Latham & Watkins, Los Angeles, CA, Lewis H. Lazarus, Morris, James, Hitchens & Williams, Wilmington, DE, David H. Braff, Bradley A. Harsch, Sullivan & Cromwell, New York City, Phillip L. Graham, Jr., Stephanie G. Wheeler, Sullivan & Cromwell, New York City, Theodore Edelman, Sullivan & Cromwell, London EC4A 1AN, England, Jeff Hammel, Latham & Watkins, New York City, Matthew J. Matule, Skadden, Arps, Slate, Meagher & Flom, Boston, MA, Paul J. Lockwood, Skadden, Arps, Slate, Meagher & Flom, Wilmington, DE, George A. Zimmerman, Joanne Gaboriault, Skadden, Arps, Slate, Meagher & Flom, New York City, Henry A. Heiman, Heiman, Aber Goldlust & Baker, Wilmington, DE, Thomas W. Evans, Janet B. Fierman, Robert M. Cohen, Cohen & Fierman, LLP, Gregg Shapiro, Kevin J. Lesinski, Choate, Hall & Stewart, Boston, MA, Diem-Suong T. Nguyen, William Fenrich, Michael P. Carrol, Davis Polk & Wardwell, New York City, William R. Moorman, Craig & Macauley, P.C., Robert J. Kaler, Gadsby & Hannah LLP, Michael J. Stone, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

SARIS, District Judge.

Plaintiffs allege that defendants SG Cowen Securities Corporation ("S.G.Cowen") an investment analyst and banker, and KPMG Singapore, a Singapore based accounting firm, committed a securities fraud that induced plaintiffs to trade their $300 million interest in Dragon Corporation ("Dragon") for stock in Lernout & Hauspie Speech Products, N.V. ("L & H"), which became essentially worthless when the alleged fraud came to light several months later. The Baker and Bamberg complaints, both arising out of the same stock-swap transactions, assert claims under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, and under common law.

The Court discussed at length the legal framework and factual background of § 10(b) claims against L & H's four inside officers in In re Lernout & Hauspie Sec. Litig., 208 F.Supp.2d 74 (D.Mass.2002) ("Lernout I"), against L & H's outside auditors In re Lernout & Hauspie Sec. Litig., 230 F.Supp.2d 152 (D.Mass.2002) ("Lernout II"), and against L & H's Audit Committee and Board of Directors in In Re Lernout & Hauspie Sec. Lit., 286 B.R. 33 (D.Mass.2002) ("Lernout III"). Familiarity with these opinions is assumed.

Both defendants have moved to dismiss. After hearing and a review of the extensive submissions, the Motions to Dismiss are ALLOWED in part and DENIED in part as to SG Cowen, and ALLOWED as to KPMG Singapore.

A. SG Cowen

1. Sufficiency of the Allegations

The Baker amended complaint alleges the following facts. SG Cowen was an investment banker and financial advisor to L & H from the time the company went public in 1995. On June 7, 2000, the Bakers, who were the majority shareholders in Dragon, purchased L & H stock. In the all-stock transaction, Dragon was merged into a U.S. subsidiary of L & H known as L & H Holdings USA, Inc. The merger agreement is dated March 27, 2000.

SG Cowen had an extensive relationship with L & H. In its 1999 Annual Review, SG Cowen describes its role in co-managing L & H's $40 million initial public offering in 1995, helping it acquire two language translation companies, initiating three more capital raising deals in 1996 and 1997, and rendering opinions on other deals such as the Bumil transaction in Korea on September 13, 1999. It touted itself as "L & H's exclusive financial adviser." It not only handled the Dragon transaction, but also the larger Dictaphone deal. Cowen billed over $800,000 in transaction fees with L & H in 1998 alone.

SG Cowen analysts Robert Stone and Ben Howe both were members of SG Cowen's investment banking team and were active in the Dragon/L & H stock-swap negotiations. Also active in the Dragon negotiations was Dan Blake, a former SG Cowen analyst who had accepted a position at L & H Investment Co. ("LHIC"), a company formed and controlled by L & H inside officers Joseph Lernout and Pol Hauspie for the purpose of funding certain L & H "related parties." After joining LHIC, Blake continued to work closely with SG Cowen, as part of the L & H/Dragon deal team.

According to the complaint, Stone and other SG Cowen representatives were aware of, approved, and even devised some of L & H's related party transactions. As outlined in Lernout I, these transactions constitute one of the three cornerstones of the securities fraud allegations: L & H improperly recognized and inflated revenue from strategic partners who were not unaffiliated customers, but related parties. On October 13, 2000, Joseph Lernout told Janet Baker that Stone, a managing director and senior analyst for SG Cowen knew about and had a direct role in establishing third-party affiliated companies through which research and development expenses could be hidden from L & H's bottom line. (Baker Amended Complaint ¶ 98.) Stone allegedly told Lernout, "There's nothing wrong with working smart." (Id., ¶ 370.)

Despite this knowledge of the related party transactions, SG Cowen issued a series of analyst reports prior to the Dragon deal promoting L & H as a good investment opportunity and a "strong buy." (Id., ¶¶ 100-102.) On January 5, 2000, SG Cowen continued to promote L & H as a "strong buy with revenues growing by fivefold, from about $100 mm in 1997 to our 2000 estimate of slightly over $550 mm." (Id., ¶ 101). SG Cowen continued to make such laudatory assessments of L & H until the fall of 2000 when L & H publicly disclosed that it was being investigated by the SEC. (See Id., ¶ 370.)

In the course of negotiations for the Dragon deal SG Cowen, through Stone, "repeatedly advocated L & H's securities" directly to the plaintiffs, "specifically citing L & H's strong revenue growth." (Id., ¶ 187.) Finally, to advance the Dragon deal, SG Cowen gave to the plaintiffs a "Deal Book" containing "extensive financial reporting and projections regarding L & H's revenue and financial status ... [which] Cowen either knew or was reckless in not knowing ... was false." (Id., ¶ 189.) The Bakers also relied on the SG Cowen analyst reports, including the February 2000 report, which contained 1999 financial information. This was completed prior to KPMG's signing off on the 1999 audit in April 2000.

To buttress allegations that Stone and L & H were in cahoots, plaintiffs allege that Stone announced that he had personally visited and inspected L & H's Korean operations and confirmed they were real the day after The Wall Street Journal article reported discrepancies in L & H's representations about its purported Korean customers (¶ 369). As it turns out, most of these customers were in fact fictitious.

2. Puffery

Defendant argues that plaintiffs have not alleged facts which, even if proved true, are sufficient to constitute a § 10(b) violation. Defendant argues that its statements describing L & H as a "strong buy" and other similar statements cannot as a matter of law give rise to liability. Defendant characterizes these and other statements made directly to plaintiffs as mere corporate "puffery," which lack the specificity or seriousness sufficient to constitute the making of a false statement. See Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1217 (1st Cir.1996) ("[C]ourts have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace — loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available."); In re Peritus Software Services, Inc. Sec. Litig., 52 F.Supp.2d 211, 220 (D.Mass.1999) (finding statements by corporate officers regarding "unprecedented market demand" of company product to be mere puffery).

However, SG Cowen's financial reports, the deal book, the "strong buy" recommendations, and the oral representations concerning past revenue, all presented by respected outside investment analysts, are precisely the kind of hard information that a "reasonable investor could find ... important to the total mix of information available." Shaw, 82 F.3d at 1217. Cf. In re Westell Technologies, Inc., 2001 WL 1313785, *12 (N.D.Ill.2001) (denying dismissal in securities fraud claim based in part on allegations that misleading statements caused analysts to rate stock as "strong buy"); In...