Garfield v. Ndc Health Corp., No. 05-14765.

• Decision Date: 12 October 2006
• Docket Number: No. 05-14765.
• Citation: 466 F.3d 1255
• Parties: Robert GARFIELD, individually and on behalf of all others similarly situated, The DeKalb County Pension Plan, Plaintiffs-Appellants, v. NDC HEALTH CORPORATION, Walter M. Hoff, Randolph L.M. Hutto, Charles W. Miller, David H. Shenk, James W. Fitzgibbons, Lee Adrean, Ernst & Young, LLP, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

466 F.3d 1255

Robert GARFIELD, individually and on behalf of all others similarly situated, The DeKalb County Pension Plan, Plaintiffs-Appellants, v. NDC HEALTH CORPORATION, Walter M. Hoff, Randolph L.M. Hutto, Charles W. Miller, David H. Shenk, James W. Fitzgibbons, Lee Adrean, Ernst & Young, LLP, Defendants-Appellees.

No. 05-14765.

United States Court of Appeals, Eleventh Circuit.

October 12, 2006.

Joseph P. Helm, III, Chitwood Harley Harnes, LLP, Martin D. Chitwood, Stuart J. Guber, Motley Rice, LLC, Atlanta, GA, for Plaintiffs-Appellants.

Todd R. David, Jessica Perry Corley, Alston & Bird, LLP, Dan S. McDevitt, M. Robert Thornton, King & Spalding, Elizabeth Vranicar Tanis, Laurance Joseph Warco, Jason Scott Alloy, Sutherland, Asbill & Brennan, Atlanta, GA, Jerome S. Hirsch, Gary J. Hacker, Joseph N. Sacca, Skadden Arps Slate Meagher & Flom, LLP, New York City, Bruce M. Cormier, Ernst & Young, LLP, Washington, DC, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before EDMONDSON, Chief Judge, and BIRCH and ALARCÓN,^* Circuit Judges.

ALARCÓN, Circuit Judge:

Lead Plaintiff DeKalb County Pension Fund ("DeKalb") appeals from the District Court's Order dismissing its Second Amended Complaint for failure to meet the heightened requirements of Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 77z-1, 78u. We affirm the District Court's Order dismissing the Second Amended Complaint and hold that DeKalb waived its right to further amendment of its Complaint by taking the instant appeal.

I

On April 07, 2004 DeKalb brought a claim in the United States District Court for the Northern District of Georgia for securities fraud as a putative class action against NDCHealth Corporation ("NDC"), several of its officers ("Individual Defendants"), and the accounting firm Ernst and Young LLP ("E&Y"). DeKalb set forth two causes of action in its Second Amended Complaint: (1) securities fraud pursuant to Section 10(b), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 CFR § 240.10b-5; and (2) violation of Section 20(a) of the Exchange Act, 15 U.S.C. 78t.

The gravamen of the Second Amended Complaint is that during the class period of August 21, 2002 through August 9, 2004, NDC "engaged in a variety of undisclosed accounting manipulations and business practices which caused the Company's financial results to be materially overstated." DeKalb alleges that NDC engaged in channel stuffing;¹ prematurely recognized sales revenue; did not follow Generally Accepted Accounting Principles; and materially misstated the value of a failed investment in a company known as MedUnite. E&Y is being sued because it served as NDC's independent auditor and issued audit opinions on the Company's 2003 and 2004 financial statements.

NDC and E&Y filed motions to dismiss DeKalb's Second Amended Complaint on October 13, 2004. After the opposition and reply papers were filed, on January 5, 2005, NDC filed a Form 8-K and a Form 12b-25 document with the SEC disclosing that it would restate its accounts for the prior period "beginning with its fiscal year ended May 31, 2002 through the first quarter of fiscal year 2005 ended August 27, 2004." The District Court took judicial notice of these documents.² The Second Amended Complaint contains no allegation regarding the restatement of accounts.

The District Court dismissed Appellant's Second Amended Complaint on July 27, 2005 with leave to amend. The order states: "Plaintiff shall file its Third Amended Complaint within thirty (30) days of entry of this Order, and Defendants shall file their motions to dismiss within thirty (30) days of the filing of the Third Amendment." In re NDC Health Corp. Inc., No. 1:04-cv-0970, slip op. at 53 (N.D.Ga. July 27, 2005). Instead of filing a third amended complaint, DeKalb filed a Notice of Appeal on August 26, 2005, the last day of the period allotted for filing an amended complaint.

II

On September 13, 2005, this Court inquired nostra sponte whether the District Court's Order of July 27, 2005 constitutes a final appealable order. In response, the parties agreed that "[g]enerally, an order dismissing a complaint is not final and appealable unless the order holds that it dismisses the entire action or that the complaint cannot be saved by amendment." Van Poyck v. Singletary, 11 F.3d 146, 148 (11th Cir.1994) (citing Czeremcha v. Int'l Ass'n of Machinists and Aerospace Workers, AFL-CIO, 724 F.2d 1552, 1554-55 (11th Cir.1984)).

"[W]here an order dismisses a complaint with leave to amend within a specified period, the order becomes final (and therefore appealable) when the time period allowed for amendment expires." Briehler v. Miami, 926 F.2d 1001, 1002 (11th Cir.1991). However, "the plaintiff need not wait until the expiration of the stated time in order to treat the dismissal as final, but may appeal prior to the expiration of the stated time period." Schuurman v. Motor Vessel "Betty K V," 798 F.2d 442, 445 (11th Cir.1986). Accordingly, this Court has jurisdiction over this timely filed appeal pursuant to 28 U.S.C. § 1291. By filing an appeal in this manner, however DeKalb elected to stand on its Second Amended Complaint and waived its right to further amendment. Schuurman, 798 F.2d at 445 ("Once the plaintiff chooses to appeal before the expiration of time allowed for amendment, however, the plaintiff waives the right to later amend the complaint, even if the time to amend has not yet expired.").

III

DeKalb argues the District Court erred in dismissing its Second Amended Complaint because, in determining that DeKalb did not plead facts sufficient to give rise to a strong inference of scienter, "[t]he District Court failed to consider all of the facts pled and also failed to view the allegations in a light most favorable to Appellant." (Appellant's Br. 34.) DeKalb also argues that "the District Court erred in determining that Appellant failed to plead the reasons for the falsity of the alleged misstatements and omissions with requisite specificity." Finally, DeKalb assigns error to the District Court for "improperly impos[ing] conditions on Appellant's right to amend its complaint."

"At the motion to dismiss stage, all well-pleaded facts are accepted as true, and the reasonable inferences therefrom are construed in the light most favorable to the plaintiff." Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273 n. 1 (11th Cir.1999). The "court reviews de novo the dismissal of a complaint pursuant to Rule 12(b)(6)." Oxford Asset Mgmt. v. Jaharis, 297 F.3d 1182, 1187 (11th Cir.2002).

Section 10(b) and Rule 10b-5 make it unlawful for any individual to employ a manipulative or deceptive device in connection with the purchase or sale of any security.³ "To allege securities fraud under Rule 10b-5, a plaintiff must show: 1) a misstatement or omission, 2) of a material fact, 3) made with scienter, 4) on which plaintiff relied, 5) that proximately caused his injury." Bryant, 187 F.3d at 1281.

Section 20(a) of the Exchange Act provides for liability of "controlling persons" who aid and abet "any person liable under any provision of this chapter or of any rule or regulation thereunder." 15 U.S.C. § 78t. DeKalb's claims under Section 20(a) are alleged against the Individual Defendants, and predicated upon the same alleged unlawful conduct relevant to its claims under Section 10b. (Compl.¶ 186.) Accordingly, the success of DeKalb's section 20(a) claim turns on the resolution of its claims under Section 10b and Rule 10b-5.

A

Channel stuffing is not fraudulent per se. Greebel v. FTP Software, Inc., 194 F.3d 185, 202 (1st Cir.1999) ("There is nothing inherently improper in pressing for sales to be made earlier than in the normal course."). In Greebel, the First Circuit commented that in the context of alleged improper revenue recognition, "channel stuffing evidence has some probative value. But that value is weak." Id. at 203; but see In re Cabletron Sys., 311 F.3d 11, 26 (1st Cir.2002) (allegations of improper revenue recognition, including fictitious sales, and channel stuffing, were supported by averments of testimonial evidence from insiders and pled with adequate specificity to survive a motion to dismiss). The Seventh Circuit determined in Makor Issues & Rights, Ltd., et al. v. Tellabs, Inc., 437 F.3d 588 (7th Cir.2006) that "[w]hile there may be legitimate reasons for attempting to achieve sales earlier via channel stuffing, providing excess supply to distributors in order to create a misleading impression in the market of the company's financial health is not one of them." Id. at 598. We agree with the Seventh Circuit that channel stuffing may amount to fraudulent conduct when it is done to mislead investors, but the allegations of channel stuffing in the instant case were not pled with sufficient detail to overcome the PSLRA's scienter hurdle.

Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."⁴ Fed. R.Civ.P. Rule 9(b). "Rule 9(b) is satisfied if the complaint sets forth `(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.'" Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1202 (11th Cir.2001) (quoting Brooks v. Blue Cross and Blue Shield of Florida, Inc., 116 F.3d 1364, 1371 (11th Cir.1997)). "A sufficient level of factual support for a [10b] claim may be found where the circumstances of the fraud are pled in detail. `This means the who, what, when where, and how: the first paragraph of any newspaper story.'" Gross v. Medaphis Corp., 977 F.Supp....