In re Ceridian Corp. Securities Litigation

• Decision Date: 05 June 2007
• Docket Number: No. 04-CV-3704 (PJS/RLE).,04-CV-3704 (PJS/RLE).
• Parties: In re CERIDIAN CORPORATION SECURITIES LITIGATION.
• Court: U.S. District Court — District of Minnesota

504 F.Supp.2d 603

In re CERIDIAN CORPORATION SECURITIES LITIGATION.

No. 04-CV-3704 (PJS/RLE).

United States District Court, D. Minnesota.

June 5, 2007.

COPYRIGHT MATERIAL OMITTED

Reed R. Kathrein, Hagens Berman Sobol & Shapiro LLP, Eli R. Greenstein, Lerach Coughlin Stoia Geller Rudman & Robbins LLP, San Francisco, CA, Frances E. Baillon, Halunen & Associates, Minneapolis, MN, and Garrett D. Blanchfield, Jr., Reinhardt Wendorf & Blanchfield, St. Paul, MN, for lead plaintiff Western Pennsylvania Electrical Employees Benefits Funds.

Peter W. Carter, Daniel J. Brown, and Seth J.S. Levanthal, Dorsey & Whitney LLP and Heather J. Klaas, Ameriprise Financial Inc., Minneapolis, MN, for Defendants.

MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS

SCHILTZ, District Judge.

This is a sprawling jumble of a securities-fraud action brought against defendant Ceridian Corporation (Ceridian) and three of its former officers: Ronald L. Turner, the former president and CEO; John R. Eickhoff, the former CFO; and Loren Gross, the former controller and principal accounting officer. This action is based on dozens, if not hundreds, of accounting errors — errors of many different types committed by many different employees over many different years. These errors' — which, for the most part, were not related — led to either three or five restatements of Ceridian's financial results (the parties dispute the number), and quite possibly cost Turner, Eickhoff, and Gross their jobs.

Seeing fraud where others might see incompetence — seeing Gordon Gekko where others might see the Keystone Cops — plaintiffs bring claims of securities fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and under the SEC's implementing regulation, Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs also bring claims of controllingperson liability under Section 20 of the 1934 Act, 15 U.S.C. § 78t."

Plaintiffs' original consolidated class-action complaint was dismissed by Judge Michael J. Davis because it failed adequately to plead scienter. With Judge Davis's permission, plaintiffs filed an amended complaint, seeking to correct the inadequacies that led Judge Davis to dismiss the original complaint. After this case was transferred to the undersigned, defendants moved to dismiss the amended complaint for failure to state a claim. For the reasons described below, defendants' motion is granted, and plaintiffs' first amended complaint is dismissed with prejudice. Plaintiffs will not be given another opportunity to amend their complaint.

I. BACKGROUND

Ceridian is a multinational informationservices company specializing in the human-resource, transportation, and retail markets. Ceridian collects, manages, and analyzes data; processes transactions; and provides customers with related products, software, and services. The company has two main components: (1) HRS, which offers human resource services, including payroll processing, tax filing, benefits administration, qualified retirement and other plan administration, and employee-assistance programs; and (2) Comdata, which provides transaction processing, financial services, and regulatory compliance services to the transportation and retail industries. In 2003 and 2004, HRS accounted for more than two-thirds of Ceridian's total revenues.

Comdata is a major issuer of credit cards, debit cards, and stored-value cards, and a major processor of payments related to the use of such cards. Comdata's wholly-owned subsidiary Stored Value Systems (SVS) offers rechargeable private-label gift and cash cards and other transaction-processing services to retailers, grocery and restaurant chains, and entertainment companies. In the transportation industry, Comdata provides trucking companies with a credit/debit type of card that truckers use for fuel and other expenses during trips, thereby enabling their employers to monitor and control these expenses. Comdata also assists clients with compliance services, such as obtaining regulatory permits, reporting fuel taxes, and auditing driver logs.

Plaintiffs seek to represent a class of investors who purchased publicly-traded Ceridian securities from April 17, 2003, when Ceridian announced its 1Q03 results, to and including March 17, 2005, when Ceridian announced that its 2004 Form 10-K annual report and its 4Q04 results would be delayed and that it would be restating its financial results for the first three quarters of 2004. First Am. Compl. ¶¶ 1, 154, 265 [Docket No. 54].

According to plaintiffs' first amended complaint, defendants fraudulently inflated the price of Ceridian's publicly-traded securities by exploiting a weak system of internal controls to manipulate the company's financial results. This scheme involved many different areas of the company and many different violations of generally accepted accounting principles (GAAP). Plaintiffs allege that these violations included, among other things, improper revenue recognition, improper expense reporting, improper accounting for derivatives, improper reserve accounting and accrual adjustments, excessive restructuring charges, improper accounting of assets and liabilities, and improper accounting for operating leases. In 2004 and 2005, Ceridian restated its previously issued financial statements a number of times — five times, according to plaintiffs' count.¹ Plaintiffs allege that, with each restatement, defendants revealed only a small part of their scheme to make lots of accounting errors and thus avoided having to reveal the full extent of their fraud all at once.

A. First Restatement

On February 18, 2004, Ceridian announced that it was retroactively changing the way its SVS subsidiary recognized revenue from the sale and servicing of storedvalue cards. Stored-value-card revenue derives both from the sale of the cards and from Ceridian's processing of the charges made to the cards. Typically these processing services begin six to eight months after the cards are shipped to the purchaser.

Before July 1, 2003, Ceridian recognized all stored-value-card revenue ratably over a 12-month period, beginning when the card was shipped. In July 2003, Ceridian announced that it would change its practice and recognize revenue from selling the cards immediately upon shipment and revenue from servicing the cards on a straight-line basis over a six-month period following activation of the card. Ceridian announced that it was making this change at the suggestion of its outside auditors on the basis of a new rule, EITF 00-21, recently announced by the Emerging Issue Task Force (EITF) of the Financial Accounting Standards Board. Rule EITF 00-21, entitled "Revenue Arrangements with Multiple Deliverables," addresses how and when a revenue transaction involving "multiple deliverables" may be divided into separate revenue-generating transactions for accounting purposes.

In the July 2003 announcement of the revenue-recognition change, Eickhoff explained that "a portion of the transaction processing revenue will be deferred and spread over six months following the transaction. On the other hand, all [SVS] card revenue will now be recognized as revenue upon delivery to customers rather than some of it being spread over time which was the case in the past." First Am. Compl. ¶ 169. Plaintiffs allege that both the pre-July 2003 policy and the post-July 2003 policy were improper.

On February 18, 2004, Ceridian announced that, after further discussions with its outside auditors, it had determined that it needed to change its stored-valuecard revenue-recognition policy yet again. Under the new policy, no card revenue is recognized until the processing of the card begins — that is, until approximately six to eight months after shipment. Approximately 90% of the revenue is then recognized over the next six months, with the remaining 10% recognized over the next 24 months. This change resulted in a restatement of the company's financial statements for all fiscal periods between December 31, 1999 and December 31, 2003, and caused large drops in revenue and earnings for each restated fiscal year.² First Am. Compl. ¶ 52 (alleging respective decreases in revenue and earnings of $7.1 million and $2.9 million for fiscal year 2000, $10.8 million and $2.6 million for fiscal year 2001, $1.7 million and $1.6 million for fiscal year 2002, and $20.9 million and $3.2 million for fiscal year 2003).

B. Second Restatement

On July 19, 2004, a few months after restating its financial reports on the basis of its new stored-value-card revenue-recognition policy, Ceridian announced that it would postpone the release of its 2Q04 results so that its audit committee, with the help of an outside auditor, could review capitalization and expensing practices in its HRS division. First Am. Compl. ¶ 224. Ceridian admitted that this review could have an impact both on its 2Q04 results and on previously reported results, and Ceridian disclosed that it had advised the SEC of its review. First Am. Compl. ¶ 224. Later, the company announced that it would not meet the filing deadline for its 2Q04 Form 10-Q and that it expected to restate its prior financial statements. Ultimately, on October 18, 2004, Ceridian announced that, based on the audit committee's review, it would be restating its financial statements for the years 1999 through 2003 and for 1 Q04.

The audit was apparently prompted by the discovery of numerous GAAP violations involving the improper capitalization of expenses for internally-developed software, but the audit ended up uncovering numerous additional problems not related to the software. The software-related violations included improperly capitalizing the cost of post-implementation software fixes (which should have been recorded as expenses); capitalizing expenditures for some projects before obtaining the requisite internal approval for the projects; capitalizing overhead costs for internallydeveloped software; failing to...