In re Cascade Intern. Securities Litigation

• Decision Date: 16 December 1993
• Docket Number: No. 91-8652-CIV-NESBITT.,91-8652-CIV-NESBITT.
• Citation: 840 F. Supp. 1558
• Parties: In re CASCADE INTERNATIONAL SECURITIES LITIGATION. This Document Relates to: All Actions.
• Court: U.S. District Court — Southern District of Florida

840 F. Supp. 1558

In re CASCADE INTERNATIONAL SECURITIES LITIGATIONThis Document Relates to: All Actions.

No. 91-8652-CIV-NESBITT.

United States District Court, S.D. Florida.

December 16, 1993.

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Atlee W. Wampler, Wampler, Buchanan & Breen, P.A., Miami, FL, Michael J. Pucillo, Burt & Pucillo(argued), West Palm Beach, FL, for plaintiffs.

Steven J. Toll, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll(argued), Washington, DC, Sherrie R. Savett(argued), Jeanne A. Markey, Berger & Montague, P.C., Philadelphia, PA, co-lead counsel for plaintiffs.

Homer L. Marlow, Joseph H. Lowe, Marlow, Connell, Valerius, Abrams, Lowe & Adler(argued), Miami, FL, for defendantKarp & Sommers.

Benjamin H. Hill(argued), Dennis P. Waggoner, Hill, Ward & Henderson, Tampa, FL, for defendantGunster Yoakley.

Keith Olin(argued), Nancy Copperwaite, Morgan, Lewis & Bockius, Miami, FL, for defendantRaymond James.

John T. Kinsey, Kinsey & Gleason, Boca Raton, FL, for defendant Deltec Securities.

Matthew J. Broderick, Dechert, Price & Rhoades(argued), Philadelphia, PA, Richard H. Critchlow, Kenny, Nachwalter, Seymour, Arnold & Critchlow, Miami, FL, for defendantCoopers & Lybrand.

Richard E. Carlton, Sullivan & Cromwell(argued), New York City, for defendant Deltec.

ORDER

NESBITT, District Judge.

This cause comes before the Court upon the Report and Recommendation of Magistrate Judge Barry L. Garber, filed May 19, 1993(D.E. # 219), regarding DefendantDeltec Securities Corporation's ("Deltec")Motion to Dismiss, filed September 16, 1992(D.E. # 128), Defendant Gunster, Yoakley & Stewart, P.A.'s ("GY & S")Motion to Dismiss, filed September 15, 1992(D.E. # 130), DefendantsAaron Karp, Howard Sommers, and Karp and Sommers's (collectively "K & S")Motion to Dismiss, filed September 30, 1992(D.E. # 147), Defendant Coopers & Lybrand's ("C & L")Motion to Dismiss, filed September 30, 1992(D.E. # 151), and DefendantRaymond James's Motion to Dismiss, filed October 1, 1992(D.E. # 155).¹

I.BACKGROUND

This action arises from the allegedly fraudulent activities of two law firms, an accounting firm, a securities broker, and an underwriter, as well as the officers and directors of the corporation, in relation to the issuance of shares of stock in Cascade International, Inc.("Cascade").Cascade was a publicly traded company made up of three divisions: cosmetics, fashion boutiques, and women's apparel stores.Throughout the late 1980s, Cascade acquired a number of clothing stores, and had intended to sell cosmetics from counters within these stores.By 1991, however, the Securities and Exchange Commission("SEC") had begun to investigate Cascade, and in December of 1991, Cascade filed for bankruptcy after revelations that it had grossly misrepresented the number of cosmetic stores it operated, and after its President and Chief Executive Officer, Victor Incendy, had disappeared.

In July of 1991, a number of complaints were filed in federal court by purchasers of the common stock of Cascade which primarily alleged violations of the securities laws against the above-named Defendants.These actions were soon consolidated into one class action, and this consolidated action was given multi-district litigation status.

In their class action complaint, Plaintiffs accuse all Defendants of making materially misleading statements or omissions.Specifically, K & S, a law firm, is accused of making misrepresentations in Cascade's filings with the SEC.GY & S, another law firm, is accused of making misleading statements, allegedly in an attempt to hide Cascade's fraudulent activity, to people who were investigating the strength of Cascade.Plaintiffs allege that C & L, an accounting firm, made fraudulent misrepresentations in the process of auditing two of the subsidiaries of Cascade, Fran's Fashions, Inc., and Conston, which were retailers of women's clothing.C & L is also accused of furthering the fraudulent activity by failing to disclose that Cascade's filings with the SEC were highly inaccurate.Raymond James, a securities broker, is accused of making false misrepresentations in the process of selling Cascade's stock.Finally, Plaintiffs allege that Deltec, an underwriter for Cascade's stock, acquired over a million unregistered shares from Cascade which it sold on the market in violation of the securities laws.

The Complaint alleges violations by all Defendants of § 10(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78j(b)("§ 10(b)"), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5("Rule 10b-5"), as well as alleges state common law claims for negligent misrepresentation and fraud.In addition, the Complaint also alleges violations of the Racketeer Influenced and Corrupt Organizations Act("RICO"), 18 U.S.C. § 1961 et seq., against K & S only, and alleges that Deltec violated §§ 12(1)and12(2) of the Securities Act of 1933,15 U.S.C. § 77l(1)-(2)("§ 12").The accused Defendants have moved to dismiss these allegations.

Magistrate Judge Barry L. Garber, in his Report and Recommendation filed May 17, 1993(D.E. # 219), recommended that all counts be dismissed against the law firms, K & S and GY & S, because Plaintiffs, inter alia, had failed to establish a duty to disclose on the part of a law firm to individuals with which the law firm did not have a fiduciary relationship.The Magistrate Judge also recommended that the counts for common law negligent misrepresentation and fraud be dismissed as to all Defendants for Plaintiffs' failure to adequately allege their reliance on the alleged misrepresentations or omissions made by Defendants.All other counts, the Magistrate Judge stated, should not be dismissed, as Plaintiffs have adequately alleged all elements of these causes of actions.

All parties have filed objections and responses to the Magistrate Judge's Report and Recommendation.The Court is required to conduct a de novo review of both these objections and the original motions to dismiss.28 U.S.C. § 636(b)(1)(1993)("A judge of the Court shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made.").

II.STANDARD OF REVIEW

The standard of review for a motion to dismiss has been clearly established.Rule 12(b)(6) of the Federal Rules of Civil Procedure authorizes a court to dismiss a claim on the basis of a dispositive issue of law.Neitzke v. Williams,490 U.S. 319, 326, 109 S.Ct. 1827, 1832, 104 L.Ed.2d 338(1989).However, the Court is confined to a review of the allegations pleaded in the Complaint, must accept those allegations as true, and must resolve any factual issues in a manner favorable to the nonmovant.SeeQuinones v. Durkis,638 F.Supp. 856, 858(S.D.Fla.1986).Thus, a claim may be dismissed pursuant to Rule 12(b)(6) only if it is clear that no relief could be granted under any set of facts consistent with the allegations.Hishon v. King & Spalding,467 U.S. 69, 73, 104 S.Ct. 2229, 2232-33, 81 L.Ed.2d 59(1984);Conley v. Gibson,355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80(1957).

Furthermore, Rule 9(b) of the Federal Rules of Civil Procedure requires that any allegations of fraud in a complaint must be stated with particularity.²However, while Rule 9(b)"serves an important purpose in fraud actions by alerting defendants to the `precise misconduct with which they are charged,'" the requirements of Rule 9(b)"must not abrogate the concept of notice pleading."Durham v. Business Management Associates,847 F.2d 1505, 1511(11th Cir.1988)(quotingSeville Industrial Machinery Corp. v. Southmost Machinery Corp.,742 F.2d 786, 791(3rd Cir.1984), cert. denied,469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327(1985));(quotingFriedlander v. Nims,755 F.2d 810, 813 n. 3(11th Cir.1985)).Therefore, "while mere conclusory allegations of fraud will not satisfy Rule 9(b), allegations which provide a reasonable delineation of the underlying acts and transactions allegedly constituting the fraud are sufficient."In re Sahlen & Associates, Inc. Securities Litigation,773 F.Supp. 342, 352(S.D.Fla.1991).

Applying these principles, and after careful consideration of the Magistrate Judge's Report and Recommendation and a de novo review of the record, it is hereby ORDERED and ADJUDGED that the Report and Recommendation is adopted in its entirety for the reasons set forth below.

III.DEFENDANTSAARON KARP, HOWARD SOMMERS, KARP AND SOMMERS, AND GUNSTER, YOAKLEY & STEWART, P.A.

In summary, the Magistrate Judge recommended that all counts of the Complaint be dismissed against the two law firms, K & S and GY & S, because Plaintiffs failed to demonstrate a law firm's duty to disclose negative information about a client to anyone with whom the law firm does not have a fiduciary relationship.

Plaintiffs object to this recommendation by stating that K & S helped prepare Cascade's fraudulent filings with the SEC, as well as drafted letters to shareholders and press releases which stated erroneous facts.Plaintiffs also argue that GY & S violated the securities laws by defending Cascade against accusations made by the press, securities analysts, and members of the public that the company was in financial difficulty, without investigating whether the representations made by GY & S on behalf of Cascade were true, as well as threatening those individuals with legal action if they investigated Cascade or published articles about the financial condition of the company.Also, Plaintiffs accuse GY & S of giving advice to Cascade without properly and fully investigating their client.Plaintiffs further argue that both firms discovered and ignored numerous "red flags," i.e., facts which Plaintiffs allege should have made the defendant law firms aware that Cascade was committing fraud, or at least compelled them to investigate their client.

Defenda...