Caiafa v. Sea Containers Ltd.

• Decision Date: 25 September 2007
• Docket Number: No. 06 Civ. 2776(RMB).,No. 06 Civ. 3563(RMB).,No. 06 Civ. 2565(RMB).,No. 06 Civ. 5655(RMB).,No. 06 Civ. 2909(RMB).,No. 06 Civ. 3099(RMB).,No. 06 Civ. 2670(RMB).,No. 06 Civ. 2744(RMB).,06 Civ. 2565(RMB).,06 Civ. 2670(RMB).,06 Civ. 2744(RMB).,06 Civ. 2776(RMB).,06 Civ. 2909(RMB).,06 Civ. 3099(RMB).,06 Civ. 3563(RMB).,06 Civ. 5655(RMB).
• Citation: 525 F.Supp.2d 398
• Parties: Anthony CAIAFA, on behalf of himself and All others similarly situated, et al., Plaintiffs, v. SEA CONTAINERS LTD., James B. Sherwood, Daniel J. O'Sullivan and Ian C. Durant, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

525 F.Supp.2d 398

Anthony CAIAFA, on behalf of himself and All others similarly situated, et al., Plaintiffs, v. SEA CONTAINERS LTD., James B. Sherwood, Daniel J. O'Sullivan and Ian C. Durant, et al., Defendants.

No. 06 Civ. 2565(RMB).

No. 06 Civ. 2670(RMB).

No. 06 Civ. 2744(RMB).

No. 06 Civ. 2776(RMB).

No. 06 Civ. 2909(RMB).

No. 06 Civ. 3099(RMB).

No. 06 Civ. 3563(RMB).

No. 06 Civ. 5655(RMB).

United States District Court, S.D. New York.

September 25, 2007.

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DECISION AND ORDER

RICHARD M. BERMAN, District Judge.

I. Introduction

This consolidated securities law action was initiated on March 31, 2006, by Beverlie Wissner, Rita and Mark Winczewski, Helane Sue Tartikoff, Dave Tartikoff Services, Inc., and Scott Scheurer ("Named Plaintiffs") on behalf of a putative class of plaintiffs ("Plaintiffs" or "Class") who purchased the securities of Sea Containers Ltd. ("SCL" or "Sea Containers" or "Company"), a Bermuda corporation, during the period February 23, 2004 through March 24, 2006 ("Class Period").¹ Plaintiffs filed a 70-page Consolidated Amended Complaint on October 4, 2006 ("Complaint"), asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended ("Securities Act Claims"), and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act Claims"), against SCL and certain of its officers, including James H. Sherwood ("Sherwood"), Daniel J. O'Sullivan ("O'Sullivan"), and Ian C. Durant ("Durant") (the "Individual Defendants") (collectively with SCL; "Defendants").² Plaintiffs allege, among other things, that Defendants materially misstated SCL's "financial statements during the Class Period. (See Compl. ¶ ("The value of Sea Containers' ferry and container assets was materially impaired throughout the Class Period and such material impairments should have been recognized and recorded in much greater amounts during the Class Period.").)

On December 20, 2006, the Individual Defendants jointly moved to dismiss the Complaint under Rules 9(b), 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure ("Fed. R. Civ.P."), arguing, among other things: (A) Plaintiffs lack standing to assert certain Securities Act Claims in Counts I and III; (B) the Securities Act Claims under Sections 11 and 12(a)(2) fail to "allege false or misleading statements in any offering, material"; (C) the Exchange Act. Claim Under Section 10(b) fails to "plead with particularity any actionable misstatements or omissions" and fails to plead facts giving rise to a "strong inference of scienter"; and (D) the claims for "control person" liability under Section 15 of the Securities Act and Section 20(a) of the Exchange Act ("Control Person Claims") fail to "allege `culpable participation' by any Individual Defendant." (See Def. Mem.) On February 2, 2007, Plaintiffs filed a Memorandum of Law which opposes the motion to dismiss and requests "an opportunity to amend the Complaint" in the event of dismissal. (Plaintiffs' Memorandum of Law, dated February 2, 2007 ("Pl.Mem."), at 25 n. 16.) On February 23, 2007, the Individual Defendants filed a Reply Memorandum of Law ("Def.Reply"). The parties waived oral argument.

For the, reasons set forth below, the Court grants the. Individual Defendants' joint motion to dismiss without prejudice.

II. Background

For the purposes of this motion, the allegations of the Complaint are taken as true. Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.1998).

During the Class Period, SCL was engaged in four main businesses: (1) passenger and freight ferry services in, among other places, the Baltic Sea, the English Channel, and New York harbor; (2) passenger rail transport between London and Scotland; (3) ownership and leasing of large cargo-shipping containers, both independently and through GE SeaCo., a joint venture with General Electric Capital Corp. ("GE Capital"); and (4) operation of hotels, restaurants, tourist trains, and river cruise ships through Orient-Express Hotels, Ltd. ("OEH"). (See Compl. ¶ 11.)

During the Class Period, SCL conducted two public offerings of SCL common stock (i.e., on February 23, 2004 covering 2.2 million shares and on December 28, 2004 covering 2.4 million shares) and one public offering of debt (i.e., on May 4, 2004 covering $103 million in 10½ Senior Notes due in 2012 ("Notes")). (See Compl. ¶¶ 7-10, 23, 32, 46, 122, 128; Def. Mem. at 4 & n. 3, 11; Exs. A, B, and P; Pl. Mem. at 19.)³

In SCL's annual report on Form 10-K filed with the Securities and Exchange Commission ("SEC") for the calendar year 2004, SCL stated the following:

In the course of preparing SCL's consolidated financial statements for the year ended December 31, 2004, SCL management concluded that SCL had insufficient personnel resources and technical accounting expertise within the accounting function to resolve and report in a timely manner non-routine or complex accounting matters in accordance with U.S. generally accepted accounting principles. As a result, procedures and documentation to review and analyze elements of the financial statements closing process and to prepare the consolidated financial statements had not reduced to a less than remote likelihood that a material misstatement in those financial statements would not be prevented or detected within a timely period in the normal course of the financial statement closing process.

(SCL 2004 SEC Form 10-K at 92; see Compl. ¶¶ 51, 99.) SCL's SEC Form 10-Q financial statements for the first three quarters of 2005 also stated that "SCL's disclosure controls and procedures were not effective." (Compl.¶¶ 58, 65, 74.)

In a press release, dated November 3, 2005, SCL announced that it intended to restructure the Company by, among other things, selling certain ferry and container assets, resulting in a total "restructuring charge" to income of $157 million in the third and fourth quarters of 2005. (Compl.¶ 71.) This figure included $99 million in "impairment charges" relating to the ferry business, $30 million in impairment charges relating to the container business, $26 million in cash expenses, and a $2 million impairment charge relating to computer systems. (Id.; Ex. I at 2.) "[T]he market reacted favorably to this announcement...." (Compl.¶ 72.)⁴

Sherwood was the founder, President, Chief Executive Officer ("CEO") and a Director of SCL from 1965 until his resignation as President and CEO on December 1, 2005 and as Director on March 20, 2006. (Compl.¶ 12.) Sherwood was replaced as CEO in January 2006 by Robert MacKenzie ("MacKenzie"), who is not named as a Defendant (Compl.¶¶ 12, 89.) Durant became Vice President and Deputy Chief Financial Officer on June 1, 2004, Senior Vice President and Chief Financial Officer ("CFO") on January 1, 2005, and President and CEO from December 1, 2005 until January 4, 2006, when he reverted to CFO. (Compl.¶ 13.)⁵ O'Sullivan was Senior Vice President for Finance and CFO from June 1997 until he retired in December 2004. (Compl.¶ 14.)

On March 24, 2006, the last day of the Class Period, SCL announced that it intended to "withdraw completely from the ferry business," resulting in an "impairment charge" to SCL's ferry assets of "approximately $415 million" as of December 31, 2005, pursuant to the Financial Accounting Standards Board's ("FASB") Statement of Financial. Accounting Standard ("SFAS") No. 144. (Compl. ¶ 81 (quoting SCL Press Release, dated March 24, 2006 ("March 24, 2006 Press Release")).) SCL also announced that certain of its containers (that were "owned and managed by SCL separately and not part of GE SeaCo.") were "being held for sale at December 31, 2005," resulting in an SFAS 144 "impairment charge" of approximately $40 million. (Compl. ¶¶ 81, 102; March 24, 2006 Press Release.) "The expected loss on these [container] sales initiated an impairment review on the Company's entire container fleet in accordance with SFAS 144," resulting in an additional impairment charge on refrigerated containers (and goodwill) of approximately $45 millions (Id.) These charges included the $157 million charge announced on November 3, 2005. (Ex. J at 2-3.)

The March 24, 2006 Press Release also announced that SCL had found "errors in the accounting for the release of accumulated foreign currency reserves related to [SCL's] sale of OEH shares," which reduced by $10.3 million SCL's gains on the sale of OEH stock in March 2005, and resulted in a restatement of SCL's financial statements for the periods ending March 31, 2005, June 30, 2005, and September 30, 2005 (the "Accounting Error Restatement"). (Compl.¶¶ 63, 70, 79.) And, the March 24, 2006 Press Release announced that SCL "would miss the deadline for filing[] its 2005 annual report." (Compl.¶ 80.) The Company's stock dropped from $12.06 per share on March 23, 2006 to $7.45 per share on March 24, 2006. (Compl.¶ 80.)

On May 3, 2006, SCL announced that an arbitration panel had ruled against SCL, awarding GE Capital approximately $16.3 million with respect to "breaches of the services agreement by which SCL provided services to GE SeaCo." (Compl.¶ 84.) During an August 17, 2006 "conference call [with] the investor community," MacKenzie stated that he had "spent a lot of time on the 31st of December balance sheet ... and where the difficulty arises is certifying the previous years. I have a responsibility to go back and certify the ... previous four years." (Compl.¶ 89.) On October 2, 2006, SCL's stock price closed at $1.04 per share and the New York Stock Exchange suspended SCL from trading. (Compl.¶ 2.)

Based upon, among other things, interviews with five "anonymous" former employees of SCL ("Confidential Sources" ("CS") 1-5), the Complaint alleges that SCL's public statements during the Class Period were misleading because Defendants failed to disclose; among other things, the following:

a. The Accounting Error, i.e., "errors in the...