Dirienzo v. Philip Services Corp.
| Decision Date | 01 April 2002 |
| Docket Number | Docket No. 99-7825. |
| Citation | 294 F.3d 21 |
| Court | U.S. Court of Appeals — Second Circuit |
| Parties | Gabriel DIRIENZO; Alan Bilgore; Paul Blanchard; Robert Gans, Ira; Robert Gans; A. Carl Helwig; Barry Zemel; Gregory N. Mappus; Herb Sudzin; Vincent Ditrano; Bruce E. Toll, Ira; Bruce E. Toll; Jane Lanzo; Internet Capital Inc.; Deborah Mieczkowski; Joseph H. Misiewicz; Colin Low; Hazel M. O'Brien; Douglas Schmidt; Charles K. Fasold; Richard Greve; Grace Shum; Ronald Glotzer; Richard Hershey; Ronald McElroy; Charles Miller; Deborah S. Greve; Robert W. Hillger; Carol F. Brink Revocable Trust; William R. Brink, Ira; William R. Brink Revocable Trust; Walter Chompski; Bradwal Investments Ltd.; Local 138, 138A & 138B International Union Of Operating Engineers Fringe Benefit Funds; Melvyn B. Fliegal; James Collins; Albert Solkov; Michael And Sophia Isaacs; Lee Pitman; Kenneth Hare; Thomas Leth; Levi Sabol; and Lawrence M. Siegel; on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. PHILIP SERVICES CORPORATION; Allen Fracassi; Philip Fracassi; Marvin Boughton; Robert Waxman; John Woodcraft; Colin H. Soule; Norman Foster; Felix Pardo; Howard L. Beck; Ray Cairns; William E. Haynes; Robert L. Knauss; Derrick Rolfe; Herman Turkstra; Salomon Brothers, Inc.; Merrill Lynch, Pierce Fenner & Smith Incorporated; BT Alex. Brown Incorporated; Morgan Stanley & Co., Incorporated; CIBC Oppenheimer Corp.; Credit Suisse First Boston Corporation; Donaldson, Lufkin & Jenrette Securities Corporation; Lehman Brothers Inc.; Schroder & Co., Inc.; Smith Barney Inc.; Furman Selz LLC; Arnhold and S. Bleichroeder, Inc.; Blackford Securities Corp.; First Albany Corporation; McDonald & Company Securities, Inc.; Janney Montgomery Scott Inc.; WM Smith Securities, Incorporated; Deloitte & Touche, Chartered Accountants, Defendants-Appellees. |
Neil L. Selinger, Jeanne F. D'Esposito, Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, NY; Jeffrey C. Block, Michael T. Matraia, Berman, DeValerio & Pease LLP, Boston, MA, of counsel, for Plaintiffs-Appellants DiRienzo, et al.
Jack M. Weiss, John T. Behrendt, Marshall R. King, Gibson, Dunn & Crutcher LLP, New York, NY, of counsel, for Defendant-Appellee Deloitte & Touche.
Gerald A. Novack, David S. Versfelt, Kirkpatrick & Lockhart LLP, Stuart I. Shapiro, Michael I. Allen, Shapiro Forman & Allen LLP, Frederick P. Schaffer, Schulte Roth & Zabel LLP, New York, NY; Charles W. Schwartz, Vinson & Elkins LLP, Craig R. Smyser, Smyser Kaplan & Veselka LLP, Houston, TX, of counsel, for Defendants-Appellees Director-Officers.
Brad S. Karp, Michael E. Gertzman, Amy B. Vernick, Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, of counsel, filed a brief for Defendants-Appellees Underwriter Defendants.
Allan A. Capute, Harvey J. Goldschmid, David M. Becker, Eric Summergrad, Securities and Exchange Commission, Washington, DC, of counsel, filed a brief for the Securities and Exchange Commission, Amicus Curiae, in support of Appellants.
Before CARDAMONE, CABRANES, Circuit Judges, and TRAGER,* District Judge.
Philip Services Corporation (Philip), a Canadian metal processing company, is alleged to have perpetrated a massive fraud upon its shareholders, the vast majority of whom are United States investors. After Philip stock prices plummeted and extensive securities fraud litigation was commenced in different states and in Canada, the Judicial Panel on Multi-District Litigation transferred all of the American suits — at Philip's request and over the objections of several plaintiffs — to the United States District Court for the Southern District of New York (Mukasey, J.). There they were dismissed, prompting two appeals that were argued together before us in March 2000.
The plaintiffs in DiRienzo, the first appeal, sued as representatives of an as-yet uncertified class of Philip investors who bought stock during the proposed class period. Most Philip shares traded during that period were sold in the United States. The DiRienzo defendants include Philip directors and officers, Philip's accountants Deloitte & Touche, LLP (Deloitte), a member of Deloitte Touche Tohmatsu, a federation of affiliated accountants headquartered in New York City, and the American underwriters of the 1997 public offering. The Liff plaintiffs in the second appeal sold their interests in five American corporations for Philip stock and cash, and sued certain Philip directors and officers for alleged fraud in connection with the sales.
Both cases were dismissed under the doctrine of forum non conveniens. Hillger v. Philip Servs. Corp. (In re Philip Servs. Corp. Sec. Litig.), 49 F.Supp.2d 629 (S.D.N.Y.1999). We reversed the district court in a split decision entered November 8, 2000. DiRienzo v. Philip Servs. Corp., 232 F.3d 49 (2d Cir.2000) (Cabranes, J., dissenting). Following that decision, the DiRienzo and Liff defendants petitioned for a rehearing. We denied the petition in Liff on February 6, 2001.
While the petition in DiRienzo was pending, this Court issued an en banc opinion in Iragorri v. United Technologies Corp., 274 F.3d 65 (2d Cir.2001). Iragorri addressed a question common to that case and DiRienzo — as well as Guidi v. Inter-Continental Hotels Corp., 224 F.3d 142 (2d Cir.2000), and Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88 (2d Cir.2000) — namely, "what degree of deference should the district court accord to a United States plaintiff's choice of a United States forum where that forum is different from the one in which the plaintiff resides." 274 F.3d at 69. Finding the answer in Iragorri dispositive of the appeal in DiRienzo, we now grant the petition for rehearing in DiRienzo, vacate so much of our prior opinion as pertains to the DiRienzo action, and issue this decision reversing the judgment of the district court.
Philip has its principal offices in Hamilton, Ontario, Canada, with subsidiaries in the United States. Philip decided to become a dominant player in the metal recovery and processing industry in the United States. From 1992-1997 it purchased 15 American companies and maintained facilities in 12 states. These efforts thereafter generated 70 percent of its corporate revenue. To raise money to carry out its corporate plans it sold stock in the United States and Canada.
Philip stock was traded on the New York Stock Exchange, the Toronto Stock Exchange, the Montreal Stock Exchange, and NASDAQ until April 30, 1996. In November 1997 it placed two secondary stock offerings that raised $380 million, of which $284 million came from United States investors and $94 million came from Canadian investors.1 To tout its 1997 stock offerings Philip aggressively promoted the stock, traveling to United States cities with "road shows," issuing press releases, and filing financial reports with the Securities and Exchange Commission (SEC). Nearly 80 percent of the shares traded in Philip's stock during the class period traded on United States exchanges.
After reporting substantial increases in earnings for the years 1995-1997, the company announced on January 26, 1998 that it would take "charges to earnings" for the 1997 fiscal year of between $250 and $275 million. The company attributed 60 percent of the charges to a restructuring and acquisition program and to an overvaluation of goodwill. Two months later Philip announced that the 1997 charges to earnings were actually $310 million, based in part on a $125 million overstatement of inventory. Additional company disclosures made in the following weeks included a further charge to 1997 income of $35 million arising from the improper recording of a copper-related transaction. Total charges against 1997 income equaled $381.2 million.
As a result, top officers resigned or were demoted. In addition, Philip has since restated its 1995 and 1996 financial statements to reduce 1995 earnings by $22.5 million and 1996 earnings by $48.4 million. Thus, instead of posting a $28.4 million profit in 1996 as initially reported, it reported a $20 million loss. Philip's share price plummeted from $13 1/8 on January 26, 1998 to $2 9/16 in July 1998, after which it traded below $2 per share.
The DiRienzo complaint alleges four wrongful schemes. First, the "metals recovery division fraud" entailed a variety of alleged accounting irregularities in the Hamilton, Ontario-based Metals Recovery Group, then headed by Robert Waxman. The alleged irregularities included failure to record transactions, overstatement of inventories, and improper deferral of losses. According to the complaint, the accounting discrepancies were resolved by Philip's taking a Canadian $192.67 million (United States $134 million) charge to income, ascribed by the company to copper trading losses in January 1998, when in fact the losses were primarily due to an overstatement of inventory.
Second, the "industrial services group fraud" involved two alleged misrepresentations associated with the 1996 acquisition of the Petrochem S.C. facility in South Carolina. Philip is claimed to have improperly capitalized $8 million in 1996 losses rather than taking them as current expenses. The company also allegedly assumed $15 million in environmental remediation liability when acquiring the facility, but failed to record it.
Third, the "fraudulent 1997 third quarter results," announced November 5, 1997, allegedly included some $24.2 million in fictitious earnings meant to bolster Philip's sale price for the November 1997 offering that closed on November 12, 1997. Fourth, "Waxman's fraud," for which Philip filed suit against Waxman in Ontario, centered around Waxman's alleged orchestration of transactions that diverted Philip's assets to himself and others between 1995 and 1997, resulting in a $90 million...
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