Cooper v. Pickett

• Decision Date: 30 January 1998
• Docket Number: No. 95-55657,95-55657
• Citation: 137 F.3d 616
• Parties: Norman COOPER; Barry Roseman, M.D., P.C. Profit Sharing Plan; Theodore Deconne; Michael Dennis; Michael Kessler, on behalf of themselves and a class of all others similarly situated, Plaintiffs-Appellants, v. Michael D. PICKETT; Merisel, Inc.; Robert F. Leff; David Wagman; James L. Brill; John J. Connors; John F. Thompson; Lehman Brothers; Robinson-Humphrey Company; Deloitte & Touche, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 616

137 F.3d 616

Norman COOPER; Barry Roseman, M.D., P.C. Profit Sharing Plan; Theodore Deconne; Michael Dennis; Michael Kessler on behalf of themselves and a class of all others similarly situated, Plaintiffs-Appellants, v. Michael D. PICKETT; Merisel, Inc.; Robert F. Leff; David Wagman; James L. Brill; John J. Connors; John F Thompson; Lehman Brothers; Robinson-Humphrey Company Deloitte & Touche, Defendants-Appellees.

No. 95-55657.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 4, 1996.

Decided Aug. 8, 1997.

As Amended On Denial of Rehearing and Rehearing En Banc

Jan. 30, 1998.

William S. Lerach, Milberg Weiss Bershad Hynes & Lerach, San Francisco, California, for plaintiffs-appellants.

Joseph P. Mascovich, Crosby, Heafey, Roach & May, Oakland, California; Hugh S. Wilson, Latham & Watkins, Los Angeles, California; Bruce G. Vanyo, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California; Robert A. Meyer, Los Angeles, California, for defendants-appellees.

Appeal from the United States District Court for the Central District of California; Manuel L. Real, District Judge, Presiding. D.C. No. CV-94-03959-R.

Before: FLETCHER, BEEZER, and KLEINFELD, Circuit Judges.

FLETCHER, Circuit Judge:

Norman Cooper, on behalf of a class of shareholders, appeals the district court's dismissal with prejudice of his second amended class action complaint, alleging securities law violations against Merisel, Inc., various Merisel officers and directors, and its accountants and underwriters. We reverse and remand.

FACTS

Merisel, Inc. is the largest American publicly held wholesale distributor of computer hardware, software, and services. Merisel buys computer products in volume from manufacturers and then ships smaller quantities to mail-order houses, computer stores, and other resellers. In September 1993, Merisel announced that it would acquire the franchise operations of Computerland Corporation, which had numerous retail outlets. The acquisition gave Merisel the right to distribute IBM, Hewlett-Packard, Compaq, and Apple computers.

Merisel announced the Computerland purchase on February 1, 1994. On February 27, Merisel announced good year-end results from 1993, and stock analysts issued favorable reports on the company's prospects. Merisel's stock rose from $14 1/2 in late 1993 to a record high of $22 1/2 on March 24, 1994.

On March 25, 1994, Merisel announced that it had filed a registration statement for a common stock offering, with the object of raising funds to retire debt from the acquisition. Shortly before the planned offering, however, on May 9, 1994, Merisel announced that although its results for the first quarter of 1994 showed increased revenues, profit margins had fallen. Merisel's stock fell, and the company cancelled the stock offering. On June 7, Merisel announced that earnings for the second quarter of 1994 would be significantly below analysts' forecasts, and profit margins continued to decline. Merisel's stock plummeted from $17 1/2 to $8 per share.

Several plaintiffs immediately filed class actions and an amended consolidated complaint was filed on August 15, 1994. The defendants moved to dismiss, and the district court dismissed without prejudice on December 19, 1994. Norman Cooper, on behalf of all persons who purchased Merisel stock between November 8, 1993 through June 7, 1994 ("plaintiffs"), then filed a Second Consolidated and Amended Class Action Complaint (the "complaint"), seeking damages for violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC"). ¹ The complaint The complaint alleges that

named as defendants Merisel, six of its officers and directors, Merisel's accountants, Deloitte and Touche ("Deloitte"), and Lehman Brothers and Robinson-Humphrey Company, Inc., investment banks which served as co-lead underwriters of Merisel's 1992 public offering and were retained to underwrite the cancelled 1994 offering. Two individual securities analysts who worked for Lehman Brothers and Robinson-Humphrey were also named.

The ... defendants falsely presented the Company's current and future business prospects and prolonged the illusion of revenue and earnings growth by making it appear that the Company's revenue and earnings growth was strong and would continue, that it was successfully countering price competition and that its acquisition of Computerland was advantageous to the Company.

Among other purposes, the complaint alleges that the Merisel defendants wished to sell their Merisel stock at inflated prices, and to keep the stock price high so that the planned May 1994 public offering would raise enough money to defray the Computerland debt. The complaint identifies sales of Merisel stock at the inflated prices by four of the individual Merisel officers. The investment banks participated so that they would make "millions in fees and discounts" for underwriting the 1994 public offering.

The complaint describes Merisel's "scheme" as follows: Merisel officers, who communicated regularly with securities analysts, told the analysts that Merisel's business was strong and that the Computerland acquisition in early 1994 would increase Merisel's earnings per share. The analysts then repeated those representations in their favorable reports. Merisel then endorsed the reports by distributing them to potential investors, who relied on the favorable reports. Merisel also faxed an internal forecast of increasing 1994 earnings to a securities analyst.

In their regular conference calls with securities analysts, Merisel's officers predicted that the Computerland acquisition would boost Merisel's 1994 earnings, that demand was strong, and that Merisel's international operations were stabilizing and could be expected to be profitable in 1994. The analysts echoed these positive assessments in their reports.

The complaint alleges that all these statements were false. Demand was softening, the profitability of the company's core business was under severe pressure from price-cutters, the European operations were still weak, international operations continued to lose money, and the Computerland acquisition would hurt Merisel's 1994 earnings. Merisel's 1993 quarterly revenues and earnings were materially overstated, because the company was improperly recognizing revenue on shipments sent to retailers who had no obligation to pay unless they resold the merchandise, shipments sent with an unlimited right to return unsold merchandise, and shipments sent to customers who had not ordered the products. All these chickens came home to roost in the June 1994 announcement of low second-quarter price margins, and the subsequent dive in the price of Merisel stock. The stock never recovered from the decline.

According to the complaint, SEC regulations create a duty to disclose the adverse information defendants concealed. The financial statements Merisel issued for the last two quarters of 1993 and for the first quarter of 1994 were materially false and misleading and "did not fairly present Merisel's financial condition," because they improperly inflated revenues by recording sales contingent on resale, recognized unsolicited shipments as revenue, and recorded revenue for merchandise that had not been shipped. This allegedly violated SEC rulings and Generally Accepted The complaint names Deloitte as a defendant because the accounting firm examined and allegedly certified the false and misleading financial statements for 1993 and approved the statement for the first quarter of 1994. Deloitte personnel were frequently present at Merisel's corporate headquarters and had access to Merisel's internal corporate financial and business information, and therefore allegedly knew of or recklessly disregarded the company's actual business condition. The complaint states that Deloitte's certification of the financial statements was knowingly false, and Deloitte also deliberately or recklessly did not comply with Generally Accepted Auditing Standards ("GAAS"). Further, the complaint alleges that stock analysts employed by Lehman Brothers and Robinson-Humphrey, the underwriters, knowingly issued false analysts' reports.

Accounting Principles ("GAAP") on reporting revenue.

The complaint alleges that all defendants violated Rule 10b-5 when they "directly and indirectly, engaged in and employed acts and a fraudulent scheme to conceal material adverse information" regarding Merisel. Merisel and its officers were also liable as "controlling persons" under § 20(a).

In late January 1995, Merisel and the other defendants filed a motion to dismiss or, in the alternative, for summary judgment. The motion included exhibits such as transcripts of Merisel's conference calls with stock analysts, and declarations denying that Merisel circulated analysts' reports or improperly recognized revenue. Plaintiffs filed an opposition and a motion to compel discovery. Although Robinson-Humphrey and Lehman Brothers had produced many pages of documents in response to Plaintiffs' discovery requests, Merisel had produced only one-half box of documents.

The district court granted the motion to dismiss with prejudice in April 1995

because [the complaint] fails to meet the pleading standards enunciated in In re GlenFed, Inc., Securities Litigation, 42 F.3d 1541 (9th Cir.1994) (en banc). The Complaint lacks concise, intelligible allegations sufficient to put the Merisel defendants on notice of their alleged wrongdoing. The Complaint also fails to plead particularized facts demonstrating that the statements made by the Merisel defendants were false when made.

The court explicitly declined to reach the summary judgment motion, designating its order as granting "the motion to dismiss only."

ANALYSIS

I. Jurisdiction

The complaint names as individual defendants Theodor J. Kundtz, a securities analyst employed by Lehman Brothers,...