Cape Ann Investors, LLC v. Lepone
| Decision Date | 31 October 2001 |
| Docket Number | No. CIV.A. 00-CV-11531RGS.,CIV.A. 00-CV-11531RGS. |
| Citation | 171 F.Supp.2d 22 |
| Parties | CAPE ANN INVESTORS, LLC, et al. v. Donald LEPONE, et al. |
| Court | U.S. District Court — District of Massachusetts |
Jeffrey B. Rudman, Andrea J. Robinson, Hale & Dorr, Boston, MA, for Donald E. Lepone, Robert F. Burns and Noreen Gottfredsen.
Thomas J. Dougherty, Ian D. Roffman, Skadden, Arps, Slate, Meagher & Flom, Boston, MA, for Deloitte & Touche.
Reid M. Figel, Kevin B. Huff, Kellogg, Huber, Hansen, Todd & Evans, Washington, DC, Silvija A. Strikis, Kellogg, Huber, Hansen, Todd & Evans, Washington, DC, for James R. Young.
MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS
On August 1, 2000, Cape Ann Investors LLC, brought a Complaint against three officers of the bankrupt NutraMax Products, Inc. (NutraMax) and its accountant, Deloitte & Touche LLP (Deloitte). The officer defendants were Donald Lepone, NutraMax's President and Chief Executive Officer, Robert Burns, NutraMax's Vice President and Treasurer, and Noreen Gottfredsen, NutraMax's Comptroller (the Officers). All defendants were alleged to have violated the Securities and Exchange Act.1
On October 2, 2000, Deloitte filed a motion to dismiss. Cape Ann thereafter requested several extensions of time to respond. On March 8, 2001, the NutraMax Litigation Trust (the Trust), established in conjunction with NutraMax's Chapter 11 bankruptcy, filed an Amended Complaint as the assignee of Cape Ann's claims.2 The Amended Complaint added three new plaintiffs. The Complaint as amended, in addition to Cape Ann's original claims, includes the pre-petition claims of NutraMax, as well as those of NutraMax's senior secured lenders (the Creditors), and certain unnamed "NutraMax shareholders who voted to approve the reorganization plan or elected thereafter to assign their claims to the Trust," who "purchased or otherwise acquired NutraMax common stock when its price was artificially inflated by defendants' false statements ..., as well as those ... who were induced to maintain their investment in NutraMax common stock by defendants' false statements" (the Electing Shareholders).
On April 2, 2001, Deloitte moved to dismiss the Amended Complaint, contesting among other grounds sufficiency of the pleadings under the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, and their timeliness under the one year statute of limitations. On April 23, 2001, Gottfredsen, appearing pro se, filed her own motion to dismiss, adopting Deloitte's statute of limitations and PSLRA arguments, while asserting lack of scienter.3 On April 27, 2001, Lepone and Burns also asserted a statute of limitations defense.4
The motions to dismiss advance four distinct arguments. First, all defendants argue that the original Complaint is barred by the Security and Exchange Act's one year statute of limitations because, as a member of NutraMax's Board of Directors and Audit Committee, Cape Ann had "storm warnings" of the discrepancies in NutraMax's financials long before the Complaint was filed.5 Second, all defendants argue that even if Cape Ann's assigned claims are timely, the Securities Act claims of the new plaintiffs are barred by the "relation back" provisions of Fed. R.Civ.P. 15(c).6 Next, Burns and Lepone argue that the plaintiffs have not plead fraud with the requisite particularity. Finally, Deloitte argues that the allegations against it (which differ materially from those asserted against Burns and Lepone) are insufficiently plead.7 On July 19, 2001, the court held a hearing focused on the arguments regarding the statute of limitations.
According to the Amended Complaint, since late 1997, Cape Ann, a significant NutraMax investor, held a seat on NutraMax's Board of Directors and Audit Committee. Amended Complaint, ¶ 138; see also Complaint, ¶ 18. On "November 28, 1997, Deloitte submitted a letter to the Audit Committee advising that, in the course of its 1997 audit, as in 1995 and 1996, it had identified a `reportable condition,' ... related to NutraMax's procedures for inventory valuation, which had required an adjustment of $2.6 million at the end of the 1997 fiscal year." Amended Complaint, ¶ 85. Deloitte also "noted numerous other errors that were not adjusted, including under-accruals of various expenses and a failure to provide adequate reserves for uncollectible accounts receivable." Amended Complaint, ¶ 86. "Deloitte further observed that, ... NutraMax['s] ... use of cycle counting as a method of inventory control procedures continued to be flawed," and adverted to "other issues that affected the reliability, timeliness and control of NutraMax's financial information." Amended Complaint, ¶¶ 87-88.
On December 15, 1997, Amended Complaint, ¶ 90.
On November 24, 1998, during the course of the 1998 audit, Deloitte "notified NutraMax's Audit Committee that ... it had identified a substantial number of `reportable conditions,' ... related to NutraMax's internal control structure and its operations, many of which involved issues that Deloitte had been aware of in previous years" including "valuing and controlling inventory." Amended Complaint, ¶¶ 99-100.
In January of 1999, NutraMax's Board of Directors voted to terminate Deloitte. In May of 1999, Arthur Anderson replaced Deloitte as NutraMax's accountant. Form 8-K, May 25, 1999. Amended Complaint, ¶ 107.
On August 18, 1999, NutraMax announced that it had replaced Lepone and Burns and that it would delay the release of its earnings reports for the quarter and for the nine months ending July 3, 1999. NutraMax also announced that it expected to restate its financials for the previous years. The next day, NutraMax's stock lost more than 40% of its value. Amended Complaint, ¶ 24. On October 15, 1999, the NASDAQ exchange delisted NutraMax's stock. On November 12, 1999, Deloitte announced that it was withdrawing its audit reports for the consolidated financial statements for 1996, 1997, and 1998. Amended Complaint, ¶¶ 25-26. On August 1, 2000, Cape Ann filed the original Complaint.
Counts I and II of the Amended Complaint are brought by the Electing Shareholders and assert violations of Rule 10b-5 against Deloitte and the Officers. Count III and IV are brought by the Electing Shareholders, the Creditors, and NutraMax, alleging common-law fraud and deceit against Deloitte and the Officers, respectively. Count V is brought by the Electing Shareholders and Creditors, alleging negligent misrepresentation against Deloitte. Count VI is brought by the Electing Shareholders, the Creditors, and NutraMax against all defendants, alleging violations of M.G.L. c. 93A. Count VII is brought by the Electing Shareholders, the Creditors, and NutraMax against Deloitte, alleging professional malpractice. Finally, Count VIII is brought by NutraMax against the Officers, alleging breach of fiduciary duty.
When considering a motion to dismiss, "[w]e must accept the allegations of the complaint as true, and if, under any theory, the allegations are sufficient to state a cause of action in accordance with the law, we must deny the motion to dismiss." Vartanian v. Monsanto Company, 14 F.3d 697, 700 (1st Cir.1994). The complaint must contain "factual allegations, either direct or inferential, respecting each material element necessary to sustain a recovery under some actionable legal theory." Glassman v. Computervision Corp., 90 F.3d 617, 628 (1st Cir.1996), quoting Gooley v. Mobil Oil Corp., 851 F.2d 513, 515 (1st Cir.1988).
The statute of limitations analysis involves two sequential steps. First, the court must determine if Cape Ann's original Complaint was timely-filed with respect to each of the named defendants. If the answer to that question is "no," the issue remains whether the claims of the late-arriving non-Cape Ann plaintiffs are nonetheless salvageable, as these plaintiffs stand in shoes different than those of Cape Ann.
A claim arising under Rule 10b-5 "must be commenced within one year after discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991); 15 U.S.C. § 78i(e). The First Circuit in Maggio v. Gerard Freezer & Ice Co., 824 F.2d 123, 127-128 (1st Cir.1987), described in general terms the parameters of the Rule's statute of limitations.
Plaintiff's federal claims, premised on violations of the Securities Exchange Act and Rule 10b-5, are governed by the Massachusetts statute of limitations for certain personal tort actions, Mass. Gen.L. ch. 260, § 2A. See supra, p. 124 & note 2; General Builders Supply Co. v. River Hill Coal Venture, 796 F.2d 8, 11 n. 3 (1st Cir.1986). Federal common law, however, determines when the statute begins to run for such claims and when the statute is tolled. Cook...
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