Druskin v. Answerthink, Inc.

• Decision Date: 05 January 2004
• Docket Number: Civ. No. 02-23304.
• Citation: 299 F.Supp.2d 1307
• Parties: DRUSKIN, et al., Plaintiff, v. ANSWERTHINK, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of Florida

Page 1307

299 F.Supp.2d 1307

DRUSKIN, et al., Plaintiff, v. ANSWERTHINK, INC., et al., Defendants.

Civ. No. 02-23304.

United States District Court, S.D. Florida.

January 5, 2004.

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Maya S. Saxena, Milberg Weiss Bershad, Hynes & Lerach LLP, Boca Raton, FL, Marc A. Topaz, Schiffrin & Barroway, Bala Cynwyd, PA, Jules Brody, Stull Stull & Brody, New York, NY, Howard Coates, Johnathan Stein, Cauley Geller Bowman & Coates, LLP, Boca Raton, FL, Mel E. Lifshitz, Joseph R. Seidman, Bernstein Liebhard & Lifshitz, New York, NY, Alfred G. Yates, Jr., Law Office of Alfred G. Yates, Jr., P.C., Pittsburgh, PA, Brian J. Robbins, Marc M. Umeda, Robbins Umeda & Fink, LLP, San Diego, CA, Robert I. Harwood, Wechsler Harwood LLP, New York, NY, Robert Randall Adler, Milberg Weiss Bershad Hynes & Lerach, Boca Raton, FL, Charles J. Piven, Baltimore, MD, for Plaintiffs.

Todd R. Legon, S. Daniel Ponce, Wallace Bauman Legon Fodiman, Ponce & Shannon, P.A., Miami, FL, Michael D. Torpey, James E. Burns, Jr., James N. Kramer, Clifford Chance U.S. LLP, San Francisco, CA, for Defendants.

ORDER DISMISSING CONSOLIDATED AMENDED COMPLAINT WITHOUT PREJUDICE

GOLD, District Judge.

I. Introduction

THIS CAUSE is before the Court upon Defendants' Motion to Dismiss (DE # 48, filed July 15, 2003) Plaintiffs' Consolidated Amended Complaint (DE # 42, filed May 9, 2003). Plaintiffs filed their Opposition to the Motion to Dismiss (DE # 59) on July 15, 2003, and Defendants filed a Reply (DE # 64) on September 15, 2003. Oral argument was held on October 24, 2003.¹ Upon review, the Motion is GRANTED, and the Consolidated Amended Complaint ("Complaint") is DISMISSED WITHOUT PREJUDICE, for the reasons stated below.

II. Jurisdiction

The Court has jurisdiction pursuant to 15 U.S.C. § 78aa (the Securities Exchange Act of 1934, also referred to as the "Securities and Exchange Act" or "Act") and 28 U.S.C. § 1331 (federal question jurisdiction).

III. Factual Background²

This is a class action brought on behalf of all purchasers of common stock of Defendant Answerthink, Inc. ("Answerthink") during the period beginning February 8, 2000 and ending April 25, 2002 (the "Class Period"). Consolidated Amended Complaint ("Complaint") ¶ 1. Plaintiffs allege two causes of action. Count alleges violations of Section 10(b) of the Securities Act and Count II alleges violations of Section 20(a) of the Act.

A. The Defendants and Related Entities

Answerthink is a business and technology consulting firm with offices in Miami, Florida. Complaint ¶¶ 25, 19. The remaining Defendants (collectively referred to as "Individual Defendants") served in the following capacities during the Class Period Defendant John F. Brennan was Answerthink's Executive Vice President and Chief Financial Officer; Ted A. Fernandez was Chairman and Chief Executive Officer; Allen A. Frank was President; and Edmund R. Miller, William Kessinger, and Bruce Rauner were members of the Board of Directors. Id. at ¶ 21. Defendants Miller and Kessinger also served as members of the Audit Committee, which met at least eight times during the Class Period. Id. at ¶ 39.

Defendant Miller founded Interprise Technology Partners ("ITP") in January 1999. Id. at ¶ 42. ITP's principals include Miller, Fernandez, and Rauner. Id. at ¶ 43. Frank, Fernandez, and Rauner served on ITP's Advisory Board. Id. During the Class Period, ITP's portfolio companies included World Commerce Online ("WCOL"), eSavio, Inc ("eSavio"). Parts Locators International, Inc. ("International Parts" or "I-Parts"), and VisualPlex, Inc. ("VisualPlex"). Id. at ¶ 42.

B. Summary of Cause Action

Plaintiffs allege that Defendants issued a series of false and misleading statements announcing "record" financial results during the Class Period. Id. at ¶ 1. Defendants allegedly defrauded the public because they overstated revenues by failing to account for invoices they knew would be uncollectible and by failing to keep a sufficient reserve for these uncollectible. Defendants allegedly made these types of fraudulent statements regarding transactions with non-related companies, particularly Waste Management, Inc. ("WMI"), and related entities. Defendants also allegedly made material omissions by failing to disclose aspects of their transactions with related entities.

Plaintiffs make allegations regarding WMI, Answerthink's largest revenue producing customer during the Class Period. Id. at ¶¶ 82-86. According to an unidentified former employee, Answerthink had "loaded up the [WMI] project with a high number of people who were working at high hourly consulting rates" which Defendants knew would be later renegotiated. Id. at ¶ 83. During the summer of 2001, Answerthink's consulting rate went from $350 an hour to $150 an hour, and the maximum hours consultants could charge went from 60-70 hours a week to 45 hours a week. Id. at ¶¶ 84-85. Yet another former employee stated that even after the hours decreased, Answerthink consultants worked more than the 45 hour maximum, and the remaining hours were placed in an "Unbilled Revenue Account" which was included as revenue even though it was "common knowledge" that Answerthink was never going to realize the revenue. Id. at ¶¶ 85-86. Defendants finally disclosed the material rate concessions it made to WMI in a conference call on February 7, 2002. Id. at ¶ 7. That same day, Defendants issued a press release announcing financial results which, allegedly for the first time, were not materially impacted through the addition of fictitious revenues. Id. In response, Answerthink stock dropped by approximately 15 percent. Id.

Defendants also allegedly made material misrepresentations in connection with its related party transactions. According to Plaintiffs, Defendants, through ITP, directed related companies to enter into contracts with Answerthink despite the fact that these companies were financially unable to fulfill the agreements. Id. at ¶ 42. Defendants allegedly required related parties³ to channel business to Answerthink as a condition of funding. Id. at ¶ 2. Plaintiffs cite to a number of unidentified former employees who allege that it was "common knowledge" that these related entities would be unable to pay their bills, yet Defendants continued to staff the projects, bill the clients, and report the revenue. Id. at ¶¶ 51-79. Through their investments in the related parties, and central role in directing their operations, Defendants learned that these parties had no ability to pay Answerthink for contracted services. Id. at 2. Nevertheless, Defendants failed to account for uncollectible receivables from these parties in a timely manner. Id. Further, Defendants failed to disclose that earnings were materially impacted by related party transactions and that the reported "record" results included revenues recognized from transactions with related parties who were near-bankruptcy and lacked the financial means to finalize sales. Id. at ¶ 1. Plaintiffs state that the full extent of Defendants' related-party transactions were finally disclosed on April 8, 2002. Id. at ¶ 8. On that day, Defendants disclosed that more than six million dollars of uncollectible accounts from these related companies had been carried on Answerthink's books throughout the Class Period, and were not written off until 2001. Id.

Plaintiffs allege that several motives induced Defendants to defraud the public: maintaining the value of their stock options, increasing the size of their bonuses, selling their Answerthink shares at inflated prices, and maintaining the image of a "high-growth" company to create the illusion that it was meeting analysts' expectations in order to attract a buyer Complaint ¶¶ 92-94, 97, 98, 99. First, Plaintiffs allege that if Defendants were unable to meet quarterly projections, then consultants (the Company's core asset) would leave. Id. at ¶ 90. As a consulting business, Answerthink's revenues were generated by its employees. Id. at ¶ 3. A significant portion of its employees' compensation was based on restricted stock options. Id. When Answerthink's stock price fell, revenue-generating consultants allegedly left the Company in droves. Id. Accordingly, Defendants were under pressure to inflate the Company's stock price. Id. Further, Defendants owned huge holdings of restricted stock in the Company and several stock options, motivating them to engage in fraud. Id. at ¶¶ 97-99. A majority of their compensation was comprised of restricted stock options which vested during the Class Period. Id. at 4. Defendant Miller's stock, for example, was used as collateral for a loan, and when the Company's stock price dropped, Miller was forced to sell $2.57 million worth of his holdings to meet a margin call.⁴ Id. Plaintiffs also allege that Defendants improperly inflated revenue in order to find a buyer for the Company. Id. at ¶ 93. Finally, Plaintiffs allege that Defendants wanted to sell their Answerthink shares at an inflated price. Id. at ¶¶ 95-96.

Plaintiffs state that Answerthink stock traded at over $34 per share at the beginning of the Class period. Id. at ¶ 14. Allegedly as a result of Defendants' accounting fraud, it was trading at only $5.90 per share by April 26, 2002. Id. The stock has not recovered in May 2003, it was trading at slightly more than $2 per share. Id.

C. False Statements During the Class Period

In support of their claim for securities fraud, Plaintiffs allege that beginning on February 8, 2000, Answerthink made material misrepresentations and omissions in its press releases and its Form 10-K and 10-Q filings with the SEC. Complaint ¶ 1. Plaintiffs state that when reporting its financial results for each quarter beginning in the fourth quarter of 1999 and ending in the third quarter of 2001, Answerthink fraudulently recognized revenue it knew it could not collect, under-reserved for doubtful accounts, and did not report its related party transact...