In re Checkers Securities Litigation

Citation858 F. Supp. 1168
Decision Date05 July 1994
Docket NumberNo. 93-1749-CIV-T-17A.,93-1749-CIV-T-17A.
PartiesIn re CHECKERS SECURITIES LITIGATION.
CourtU.S. District Court — Middle District of Florida

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Atlee W. Wampler, III, Wampler, Buchanan & Breen, P.A., Miami, FL, Rachel Sirota, Sirota & Sirota, New York City, for Colby Collier.

Atlee W. Wampler, III, Wampler, Buchanan & Breen, P.A., Miami, FL, Richard S. Schiffrin, Schiffrin & Craig, Bala Cynwyd, PA, for Smith Barney.

Atlee W. Wampler, III, Wampler, Buchanan & Breen, P.A., Miami, FL, Curtis V. Trinko, Law Offices of Curtis V. Trinko, New York City, for Charles J. and Janet P. Dick.

Atlee W. Wampler, III, Wampler, Buchanan & Breen, P.A., Miami, FL, Lawrence A. Sucharow, Goodkind, Labaton, Rudoff & Sucharow, New York City, for Sandy R. Levy.

Atlee W. Wampler, III, Wampler, Buchanan & Breen, P.A., Miami, FL, Robert A. Skirnick, Daniella Quitt, Wechsler, Skirnick, Harwood, Feffer & Halebian, New York City, for Stephen Richek.

Richard M. Kirby, Jones, Day, Reavis & Pogue, Atlanta, GA, Charles P. Campbell, Jr., Shumaker, Loop & Kendrick, Tampa, FL, for Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, Paul C. Campbell, George W. Cook, Jared D. Brown, Harry S. Cline, James M. Roche, N. John Simmons, Jr., James F. White, Jr.

Phillip S. Dingle, Hill, Ward & Henderson, P.A., Tampa, FL, Sidney Davis, Davis, Scott Weber & Edwards, P.C., New York City, for KPMG Peat Marwick.

ORDER

KOVACHEVICH, District Judge.

This cause is before the Court on Defendant Checkers Drive-In Restaurants' and the Individual Defendants' Dispositive Motion to Dismiss, and on Defendant KPMG Peat Marwick's Dispositive Motion to Dismiss (Dkts. # 13 and 16). This Court has reviewed Defendant Checkers Drive-In Restaurants, Inc.'s and the Individual Defendants' Brief in Support of Dispositive Motion to Dismiss (Dkt. # 14), Defendant KPMG Marwick's Memorandum of Law in Support of Dispositive Motion to Dismiss (Dkt. # 17), Plaintiffs' Memorandum of Law in Opposition to Defendants' Motions to Dismiss (Dkt. # 24), Checkers Defendants' Reply Memorandum in Further Support of their Dispositive Motion to Dismiss (Dkt. # 30), Defendant KPMG Peat Marwick's Reply Memorandum in Further Support of its Dispositive Motion to Dismiss (Dkt. # 31), and Plaintiffs' Memorandum in Further Opposition to Defendants' Motion to Dismiss (Dkt. # 32, Exhibit A).

PARTIES

The Plaintiffs in this action are Colby L. Collier, Smith Barney as custodian for John Mattia, IRA, Charles J. and Janet P. Dick, Sandy R. Levy, Stephen Richek and all other Plaintiffs within the Class period if the class is certified. Defendant Checkers is a Delaware Corporation with its principal executive offices in Clearwater, Florida. It develops, produces, owns, operates, and franchises quick service hamburger restaurants designed with a distinctive theme and a double drive-through concept.

Individual Defendants are Herbert G. Brown, Director and Chairman of the Board; James E. Mattei, Co-founder, Director, Chief Executive Officer, and President; Paul C. Campbell, Vice President and Chief Financial Officer from April 1990 until 1991; George W. Cook, Director and Executive Vice President of Purchasing, Human Resources, Security, and Training, and President of Champion Modular Restaurant Company, Inc. (consolidated wholly owned subsidiary of Checkers); Jared D. Brown, Director, Vice President of Franchising, Marketing, and Advertising, and Secretary-Treasurer; Harry S. Cline, Director and member of the Audit Committee (his law firm rendered legal services to Checkers); James M. Roche, Director and member of the Audit Committee; John Simmons, Jr., Vice President of Finance and Chief Financial Officer since 1992 (prior partner of Checkers' auditors); James F. White, Jr., Chief Operating Officer and Director (his law firm acted as legal counsel to Checkers). Defendant Peat Marwick is a certified public accounting firm, and audited and reported upon Checkers' financial statements that were filed with the SEC and disseminated to the investing public, beginning with fiscal year 1989 and continuing during the Class period.

BACKGROUND

This is a class action consisting of Plaintiffs who purchased, converted, exchanged, or otherwise acquired shares of common stock of Checkers during the Class period. Plaintiffs allege during the period of November 22, 1991 through October 8, 1993 Checkers, officers and/or directors of Checkers, and KPMG Peat Marwick "acted in concert" to falsify Checker's financial statements by systematically overstating revenue and understating expenses. Plaintiffs contend that Checkers issued materially false and misleading financial statements that artificially inflated the market price of its common stock.

Plaintiffs further argue that Peat Marwick was at no time an independent auditor. Plaintiffs contend Defendant Simmons, a Peat Marwick partner, was rewarded by Checkers with appointment to the position of Vice President and Chief Financial Officer soon after the Initial Public Offering. Additionally, Plaintiffs allege Peat Marwick was rewarded with additional work and the security of knowing that its future retention, as auditors, was assured.

Plaintiffs allege that revenue was falsely and materially overstated through the improper recognition of revenue, using the percentage-of-completion method of accounting during the short-term construction of modular restaurant units by Champion; and through the improper recognition of revenue on purported "sales" of franchises and modular restaurant units when, in fact, such "sales" were temporary transfers of ownership, primarily to related parties who later "resold" such franchises and modular restaurant units to Checkers. Plaintiffs allege that expenses were falsely and materially understated through the failure to provide for warranty costs, payroll taxes for employees improperly stated as independent contractors, payroll-related costs, and interest and penalties on delinquent payroll taxes.

Plaintiffs argue that by reason of their positions as directors and/or executive officers of Checkers, each of the Individual Defendants possessed intimate knowledge of, participated in, or approved and ratified the deceptive and manipulative acts, practices and transactions, and the material omissions and false and misleading statements contained in the reports and financial statements of the Company and in press releases and other reports of the Company.

Additionally, Plaintiffs contend such constituted a course of conduct designed to defraud and deceive the public and to perpetrate a fraud on the market for Checkers' securities. Plaintiffs allege Individual Defendants concealed the adverse facts concerning Checkers' revenues and expenses so that they could (1) protect their executive/directorship positions and substantial compensation or prestige; (2) enhance the value of their personal Checkers' securities holdings and options; (3) inflate the apparent profits in order to support the market for various securities offerings; and (4) conceal and cover up their own misconduct and mismanagement.

The Consolidated Complaint alleges six causes of action against Checkers, the Individual Defendants, and Peat Marwick: (1) alleges violation of Sections 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all Defendants; (2) alleges violation of Section 20(a) of the Exchange Act against the Individual Defendants; (3) alleges against Peat Marwick for Aiding and Abetting; (4) alleges Common Law Fraud and Deceit against all Defendants; (5) alleges Negligent Misrepresentation against all Defendants; (6) alleges violation under Sections 517.211 and 517.301 of the Florida Securities Investor Protection Act ("FSIPA") against all Defendants.

Ruling on a motion to dismiss before turning to motion for class certification is proper. Morse v. Weingarten, 777 F.Supp. 312, 314 (S.D.N.Y.1991). A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that Plaintiff can prove no set of facts that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). A trial court, in ruling on a motion to dismiss, is required to view the complaint in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).

1. ALLEGATIONS PURSUANT TO SECTIONS 10(b) OF THE EXCHANGE ACT AND RULE 10b-5

Pleading fraud with greater specificity than is normally required by the Federal Rules is necessary in order to (1) provide Defendants with sufficient notice of the acts of which the Plaintiff complains to enable them to frame a response, (2) prevent fishing expeditions to uncover unknown wrongs and (3) protect Defendants from unfounded accusations of immoral and otherwise wrongful conduct. Knight v. E.F. Hutton and Co., Inc., 750 F.Supp. 1109, 1114 (M.D.Fla.1990).

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. First Union Brokerage v. Milos, 717 F.Supp. 1519, 1522 (S.D.Fla.1989). A strict application of Rule 9(b) in class action securities fraud cases could result in substantial unfairness to persons who are the victims of fraudulent conduct. In re United States Oil and Gas Litig., 1988 WL 28544 at 1 (S.D.Fla.1988).

Only purchasers and sellers of securities may maintain an action under Rule 10b-5. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 95 S.Ct. 1917, 1923, 44 L.Ed.2d 539 (1975). A cause of action under Section 10(b) or Rule 10b-5 requires that the Plaintiff prove (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) upon which the Plaintiff relied (5) that proximately caused the Plaintiffs'...

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