D.E. & J Ltd. Partnership v. Conaway
| Decision Date | 19 September 2003 |
| Docket Number | No. 02-CV-70684-DT.,02-CV-70684-DT. |
| Citation | 284 F.Supp.2d 719 |
| Parties | D.E. & J LIMITED PARTNERSHIP, Individually and on behalf of all others similarly situated, Plaintiff, v. Charles CONAWAY, Jeffrey Boyer, Mark S. Schwartz, Matthew F. Hilzinger, Martin E. Welch, and PricewaterhouseCoopers, LLP, Defendants. |
| Court | U.S. District Court — Eastern District of Michigan |
Sanford Dumain, Brian C. Kerr, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, On behalf of the Plaintiffs.
Katharine M. Ryan, Schiffrin & Barroway, LLP, Bala Cynwd, PA, On behalf of the Plaintiffs.
E. Powell Miller, Miller Shea, P.C., Troy, MI, On behalf of the Plaintiffs.
Scott R. Lassar, Hille R. Sheppard, Sidley, Austin, Chicago, IL, On behalf of Defendant Conaway.
David H. Kistenbroker, Katten Muchin Zavis, Chicago, IL, On behalf of the Defendants Hilzinger and Welch.
Martin L. Perschetz, Matthew L. Craner, Schulte Roth & Zabel LLP, New York, NY, On behalf of Defendant Boyer.
Brian Rosner, Law Office of Brian Rosner, New York, NY, On behalf of Defendant Schwartz.
Eric H. Lipsitt, Williams Mullen, Detroit, MI, On behalf of Defendant Schwartz.
James J. Boland, Kirkland & Ellis LLP, Chicago, IL, On behalf of PricewaterhouseCoopers.
Tom Tallerico, Bodman, Longley & Dahling, LLP, Troy, MI, On behalf of PricewaterhouseCoopers.
Philip T. Carter, Patrick McCarthy, Howard & Howard, Bloomfield Hills, MI, On behalf of Kmart Corporation, Intervenors.
The above-captioned securities fraud action is a consolidation of several complaints1 filed as putative class actions against five senior executive officers (the "Individual Defendants") of Kmart Corporation and Kmart's outside auditiors, PricewaterhouseCoopers LLP. The case is presently before the Court on five separate Motions to Dismiss filed by the Defendants as their initial responsive pleadings. Plaintiffs have responded to the Defendants' Motions to which response Defendants have replied. The Court also ordered supplemental briefing following the hearing held on this matter on July 10, 2003 and the parties filed Supplemental Briefs in accordance therewith. Having reviewed and considered the parties' briefs and the applicable law, and having heard the oral arguments of counsel on July 10, 2003, the Court is now prepared to rule on this matter. This Opinion and Order sets forth the Court's ruling.
On February 21, 2002, D.E. & J Limited Partnership initiated this securities fraud action on behalf of a class consisting of persons and entities who purchased securities of Kmart Corporation between March 13, 2001 and May 15, 2002.2 In accordance with the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, et seq. (the "PSLRA"), D.E. & J subsequently published notice of the potential class action and pursuant thereto, within six months of the filing of D.E. & J's initial Complaint, a number of parties moved to intervene and requested to be named lead plaintiffs in the action.3 Four additional separate complaints were also filed on behalf of several other Kmart shareholders and bondholders.4 On August 22, 2002, the Court entered an Order consolidating the five separately-filed cases and directed the filing of an amended consolidated complaint. The parties thereafter stipulated to Plaintiffs' amendment of the Amended Consolidated Complaint and, pursuant to that stipulation, on November 1, 2002, Plaintiffs filed their "Corrected Consolidated Amended Complaint.".5 In lieu of an answer, the various Defendants filed separate Motions to Dismiss. Pre-hearing briefing on Defendants' Motions continued through mid-June 2003.
Proposed Lead Class Plaintiffs, Ascend Capital, LLC, Ronald and Kathleen Bergh, and Frederick Dominikus collectively purchased 1,149,400 shares of Kmart stock between May 17, 2001 and January 22, 2002 (the "Class Period") and suffered approximately $2,943,503.00 in losses.6
Kmart is a discount retailer based in Troy, Michigan. Kmart stores are located in all 50 of the United States, Puerto Rico, the United States Virgin Islands and Guam. On January 22, 2002, Kmart announced that it had filed for Chapter 11 bankruptcy protection.
Defendant Charles Conaway served as Kmart's Chairman and Chief Executive Officer ("CEO") from May 2000 until his resignation in March 2002. Defendant Jeffrey Boyer served as the Company's Chief Financial Officer ("CFO") for approximately six months, from May 3, 2001 until November 9, 2001. Boyer was preceded by Defendant Martin Welch who served as the Company's CFO until his resignation in May 2001. (Prior to assuming the CFO position, Boyer served as an Executive Vice President of the Company.)
Defendant Mark Schwartz served as Kmart's President and Chief Operating Officer ("COO") from March 14, 2001 until November 9, 2001. Prior to that time, from September 2000 until March 2001, Schwartz served as Executive Vice-President, Store Operations. Defendant Matthew Hilzinger served as Kmart's Vice President and Controller until his resignation in July 2001. Defendants Conaway, Boyer, Welch, Schwartz and Hilzinger are referred to collectively herein as the "Individual Defendants."
Defendant PricewaterhouseCoopers LLP ("PwC") is a worldwide firm of certified public accountants, auditors and consultants that provides a variety of accounting, auditing and consulting services. PwC, through its Detroit office, served as Kmart's auditor and principal accounting firm prior to and throughout the Class Period.
Plaintiffs allege that from March 2001 to May 2002, Kmart and certain of its officers made a series of false or misleading public statements and press releases about the Company's financial performance. (See Compl., ¶¶ 47, 50-53, 56-58, 59-63, 66-72, 74.) Specifically, Plaintiffs allege throughout the Class Period, Kmart and the Individual Defendants represented through press releases that Kmart was experiencing a turnaround as it was improving its operations, maintaining and/or improving its gross margins and positioning the Company to better compete with Wal-Mart and Target.7 Plaintiffs allege, however that these representations failed to disclose the following "adverse factors" affecting Kmart during the this period of time:
1. Vendor Rebates. (Compl.¶¶ 33-35). Plaintiffs allege that prior to and throughout the Class Period, Kmart was utilizing an estimation process for the reporting of vendor rebates. Kmart reported vendor rebates as a reduction of expenses in its interim financial statements based on an estimated amount of sales that it expected to achieve by the end of the year. Kmart was recognizing these rebates without a written commitment from the vendor and prior to actually earning the rebate. Plaintiffs further allege that the Company was setting aggressive, unattainable sales forecasts and used these unattainable projections in making its rebate estimates, thereby causing the Company to recognize increased levels of rebates which it was not assured of receiving.
2. Supply Chain Management Problems. (Compl.¶¶ 36-41). Plaintiffs allege that Kmart was having problems tracking and monitoring its inventory and lacked the systems and internal controls to do so.
3. Problematic Relationship with Vendors. (Compl.¶¶ 42-43). Plaintiffs allege that both prior to and during the Class Period, Kmart was very aggressive in dealing with vendors, regularly charging them (which amounted to a deduction on an invoice of monies owed by Kmart) for even the slightest failure to comply with Kmart's delivery policies, which created the risk that vendors would curtail their business with the Company.
4. Failure of the "Bluelight Always" Marketing Campaign. (Compl.¶¶ 44-46). Kmart expanded its "Bluelight Special" marketing program to "Bluelight Always" in the summer of 2001 by cutting prices in an attempt to enable it to compete with Wal-Mart and Target. The strategy was unsuccessful as Wal-Mart and Target responded by cutting its own prices and Kmart was unable to respond accordingly. As a result, customer traffic did not increase and inventory began to build up. Further, the price cuts that Kmart implemented in connection with the campaign significantly decreased the Company's gross margins.
In addition to these alleged omissions, Plaintiffs claim that Kmart issued false and misleading financial statements during the Class Period. (See Compl., ¶¶ 48, 54, 64, 73, 100, 139). Specifically, Plaintiffs claim that Kmart's fiscal year 2000 annual, and fiscal year 2001 quarterly and annual financial statements were false or misleading in the following respects:
• Kmart estimated vendor rebates to be received at year-end and recorded those estimates during the interim periods, allegedly in violation of GAAP (Generally Accepted Accounting Principles).8 (See Compl., ¶¶ 99-116). Plaintiffs allege that this practice impacted on Kmart's interim (quarterly) financial statements (but not its annual financial statements).
• The Company allegedly failed to disclose Kmart's policy of estimating and recording vendor rebates during interim periods, and misrepresented the reason for Kmart's change in this policy in the fourth fiscal quarter of 2001, which impacted on the Company's 2001 annual financial statements. (Compl., ¶¶ 117-122).
• Kmart allegedly failed to disclose certain retention loans made to key Kmart executives during 2001. (Compl., ¶¶ 123-25).
• The Company failed to write down inventory. (Compl., ¶¶ 126-34).
• Kmart failed to record a $167 million loss contingency in the second quarter of 2001, impacting on the Company's interim financial statements for the second fiscal quarter 2001. (Compl., ¶ 139.)
Plaintiffs allege that, because of the Individual Defendants' positions...
To continue reading
Request your trial
-
Local 295/Local 851 Ibt Emp'r Group Pension Trust v. Fifth Third Bancorp.
...majority" of district courts within the Sixth Circuit allow group pleading in post-PSLRA cases), with D.E. & J Ltd. P'ship v. Conaway, 284 F.Supp.2d 719, 731 n. 12 (E.D.Mich.2003) (district courts still allowing group pleading have done so without explanation or relied on pre-PSLRA authorit......
-
Alliance for Children v. City of Detroit Schools
...contemplation of Rule 15(a)." Confederate Mem'l Ass'n v. Hines, 995 F.2d 295, 299 (D.C.Cir.1993), quoted in D.E.&J. Ltd. P'ship v. Conaway, 284 F.Supp.2d 719, 751 (E.D.Mich.2003). This Court's disfavor of such a bare request in lieu of a properly filed motion for leave to amend was made cle......
-
In re Huffy Corp. Securities Litigation
...2000) (Sargus, J.). However, other District Courts have reached the opposite conclusion. See, e.g., D.E. & J Ltd. Partnership v. Conaway, 284 F.Supp.2d 719 (E.D.Mich.2003). This Court is convinced by the rationale adopted by the Third, Fifth and Seventh Circuits in, respectively, Winer Fami......
-
Llewellyn-Jones v. Metro Prop. Grp., LLC
...to “the defendants” or other such categories by themselves fail the specificity test of Rule 9(b). See D.E. & J Ltd. Partnership v. Conaway, 284 F.Supp.2d 719, 730 (E.D.Mich.2003) (observing that “[n]ot only does such ‘group pleading’ run afoul of Central Bank [v. First Interstate Bank of D......
-
Opinions Actionable As Securities Fraud
...in fact or the speakers were aware of facts undermining the positive statements” (emphasis added)); D.E. & J Ltd. P’ship v. Conaway, 284 F. Supp. 2d 719, 741 (E.D. Mich. 2003) (stating that the opinions at issue would be false if issued “without a genuine belief or reasonable basis”). 43. V......