Emcore Corporation v. Price Water House Coopers LLP

Decision Date01 July 2000
Docket NumberCivil Action No. 99-5401
CourtU.S. District Court — District of New Jersey

Stephen Greenberg, Stern & Greenberg, Roseland, NJ, Marc Kasowitz, Jonathan Minsker & Harold Levinson, Kasowitz, Benson, Torres & Friedman LLP, Newark, NJ, Attorneys for Plaintiff Emcore.

William Reilly, McCarter & English, LLP, Newark, NJ, Francis Barron, Amy Candido, Julie North, Cravath, Swaine & Moore, New York, NY, Attorneys for Defendants.




Plaintiff Emcore Corporation, a publicly-held corporation based in Somerset, New Jersey, designs and manufactures compound semiconductor wafers and devices used in the production of electronic goods. This action arises, according to plaintiff, out of the concerted illegal actions taken by defendants PricewaterhouseCoopers LLP ("PWC"), certain PWC partners, and PWC's in-house counsel Walter Ricciardi.

The core of plaintiff's charges is that PWC performed auditing services for Emcore while PWC partners owned Emcore stock, in violation of federal and state regulations mandating that auditors be independent of their clients. Emcore alleges that defendants concealed such violations and misrepresented the nature and extent of an investigation into PWC's business practices by the Securities Exchange Commission ("SEC"). Plaintiff's amended complaint asserts counts against all defendants under the federal RICO statute, 18 U.S.C. § 1962(c) (Counts I and II), New Jersey state RICO, N.J.S.A. § 2C:41-2(c) (Count IV), federal and state RICO conspiracy (Counts III and V), as well as state law claims for fraud, negligent misrepresentation, the New Jersey Consumer Fraud Act, breach of fiduciary duty, malpractice, and breach of contract (Counts VI-XI).

Briefly, the parties' history together is as follows: In 1984, Emcore formed as a limited partnership, and the defendant PWC partners purchased interests in it. And in 1986, when Emcore became a corporation, the PWC partners converted their limited partnerships into Emcore stock and warrants. Also in that year, Emcore retained Coopers & Lybrand ("Coopers") to audit its 1986 fiscal year financial statements. Coopers served as Emcore's auditor each fiscal year from 1986 through 1997. Emcore asserts that it chose not to retain Price Waterhouse as its initial auditors because Price Waterhouse, through its partners' investments in Emcore, was not independent.

In July 1998, Price Waterhouse and Coopers merged to form PricewaterhouseCoopers. Soon after, PWC began its audit of Emcore's 1998 fiscal year financial statements, which plaintiff claims was crucial to its plan to conduct a secondary public offering in early 1999. Emcore planned to use the capital thus raised to fund a joint venture with General Electric.

On January 14, 1999, unknown to Emcore, the SEC entered a Settlement Order against PWC which recited that the firm (and its predecessor Coopers) had repeatedly violated applicable auditor independence regulations. What happened next is disputed.

Emcore charges that the defendants belatedly disclosed the independence violations on January 29, 1999. PWC partner Brendan Dougher informed Emcore's CEO Tom Werthan on February 1, 1999 — the day before Emcore was to file its Form S-3 Registration Statement with the SEC — that PWC would not sign its consent for Emcore to incorporate past audit opinions (the "consent") into the SEC filing until all partners had disposed of their Emcore holdings. Am. Compl. ¶ 54. Even then, plaintiff claims, defendants continued their pattern of concealment by misrepresenting facts about the SEC investigation and assuring Emcore that its upcoming public offering would not be further delayed. Id. ¶ 55. Further, despite defendants' representations that PWC partners had fully divested their Emcore stock by February 3 or 4, 1999, some PWC partners owned Emcore shares as late as mid-March of that year. Id. ¶ 75. By the time Emcore saw the full picture, the SEC announced in May that Emcore would have to re-audit its 1998 financial statements, and Emcore retained Deloitte & Touche LLP to do so, plaintiff's public offering had been delayed to June 1999.

On the other hand, the PWC defendants claim that as soon as they became aware of the compliance issues, they advised Emcore of the need to disclose the violations to the SEC and promptly disposed of their Emcore holdings. PWC Br. at 2. On February 4, 1999, PWC signed the consent and Emcore filed with the SEC immediately afterward. Defendants concede that SEC clearance process was delayed, but insist that the delay was partly because the Commission had other substantive concerns about Emcore, and that they never predicted whether a re-audit would be required. In short, defendants argue that they acted promptly to correct any regulatory violations, committed no fraud, and cannot be held responsible for the delay in Emcore's public offering.

On June 11, 1999, Emcore consummated its public offering of 3,897,441 shares of common stock at a price of $19.00 per share.

Defendants now move to dismiss the amended complaint pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). The court heard oral argument on June 26, 2000.

I. Standard for Motion to Dismiss

On a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the non-moving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3rd Cir. 1994). The question is whether the plaintiff can prove any set of facts consistent with its allegations that will entitle it to relief, not whether it will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegation. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n.2 (1977). Moreover, the plaintiff must set forth sufficient information to outline the elements of its claims or to permit inferences to be drawn that these elements exist. See Fed. R. Civ. P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

II. RICO Standing

Emcore alleges that it suffered two distinct types of injury as a direct result of defendants' RICO violations: 1) it paid PWC for an audit "which ultimately was worthless" and was forced to retain and pay Deloitte & Touche to re-audit its 1998 financial statements and 2) its public offering was delayed, which damaged its relationships with its business venture partners, including General Electric, lenders, vendors and underwriters. Am. Compl. ¶¶ 46, 104.1

Defendants initially raise a standing argument: they argue that because their alleged acts did not proximately cause Emcore's injuries, the federal and state RICO claims should be dismissed.

A civil RICO plaintiff "only has standing if, and can only recover to the extent that, [it] has been injured in [its] business or property by the conduct constituting the violation." Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). Under Supreme Court precedent, simple "but for" causation does not establish RICO standing. Holmes v. Sec. Investor Protection Corp., 503 U.S. 258, 267 (1992). Instead, a RICO plaintiff must show that defendants' acts proximately caused its injuries. Id. The Holmes Court recognized that this inquiry, analogous to that into antitrust standing, is a prudential one:

[W]e use "proximate cause" to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts. At bottom, the notion of proximate cause reflects "ideas of what justice demands, or of what is administratively possible and convenient."

Id. at 268-69 (citations omitted). Fortunately, the Court then explained three concerns which guide the standing determination:

First, the less direct an injury is, the more difficult it becomes to ascertain the amount of plaintiff's damages attributable to the violation, as distinct from other, independent, factors. Second, quite apart from problems of proving factual causation, recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. And, finally, the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.

Id. at 269-70 (citing, inter alia, Assoc. Gen. Contractors, 459 U.S. 519 (1983)). This analysis applies to both federal and New Jersey RICO claims. See, e.g., Callahan v. A.E.V., Inc., 182 F.3d 237, 260 (3rd Cir. 1999) (federal RICO); Interchange State Bank v. Veglia, 668 A.2d 465, 472 (N.J. Super. Ct. App. Div. 1995) (state RICO).

The Third Circuit has recently decided several illustrative cases. In Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3rd Cir. 1999), plaintiff union health and welfare funds sued tobacco companies and industry organizations, alleging that the defendants were liable for the funds' costs to treat their participants' smoking-related illnesses. The Circuit Court rejected plaintiffs' theory, reasoning: "[I]f the Funds are allowed to sue, the court would need to determine the extent to which their increased costs for...

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