In re Ikon Office Solutions, Inc. Securities Lit.

• Decision Date: 06 February 2001
• Docket Number: No. 98-CV-4286.,No. MDL 1318.,MDL 1318.,98-CV-4286.
• Citation: 131 F.Supp.2d 680
• Parties: In re IKON OFFICE SOLUTIONS, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

131 F.Supp.2d 680

In re IKON OFFICE SOLUTIONS, INC. SECURITIES LITIGATION.

No. MDL 1318.

No. 98-CV-4286.

United States District Court, E.D. Pennsylvania.

February 6, 2001.

COPYRIGHT MATERIAL OMITTED

Deborah R. Gross, Law Offices of Bernard M. Gross, Philadelphia, PA, Robert P. Frutkin, Savett, Frutkin, Podell and Ryan, P.C., Philadelphia, PA, Lynn Lincoln Sarko, Britt L, Tinglum, Keller Rohrback, Seattle, WA, Jerome M. Congress, Justin C. Frankel, Milberg, Weiss, Bershad, Hynes & Lerach LLP, New York City, Douglas Risen, Berger & Montague, Philadelphia, PA, Patrick Slyne, Stull, Stull & Brody, New York City, for Philip Cohen, Sandra Cohen, plaintiffs.

Todd S. Collins, Berger & Montague, P.C., Philadelphia, PA, Jules Brody, Aaron L. Brody, Stull, Stull & Brody, New York City, Jared Specthrie, Samuel H. Rudman, Lee A. Weiss, Jerome M. Congress, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Robert P. Frutkin, Savett, Frutkin, Podell and Ryan, P.C., Philadelphia, PA, Lynn Lincoln Sarko, Britt L, Tinglum, Juli E. Farris, Keller Rohrback, Seattle, WA, for Randy Leach, Judy Leach, plaintiffs.

Todd S. Collins, Berger & Montague, P.C., Philadelphia, PA, Jules Brody, Aaron L. Brody, Stull, Stull & Brody, New York City, Jared Specthrie, Samuel H. Rudman, Lee A. Weiss, Jerome M. Congress, Justine C. Frankel, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Robert P. Frutkin, Savett, Frutkin, Podell and Ryan, P.C., Philadelphia, PA, Lynn Lincoln Sarko, Britt L, Tinglum, Juli E. Farris, Keller Rohrback, Seattle, WA, for Oliver Scofield, Dan Watson, Frederick L. Goldfein, Stanley Knapp, Lawrence Porter, Gerald J. Galiger, plaintiffs.

Eleanor Morris Illoway, Harkins Cunningham, Philadelphia, PA, Rory O. Millson, Alan J. Hruska, Thomas G. Rafferty, Gerald A. Ford, Miriam Hechler Baer, Andrew G. Gordon, Cravath, Swaine & Moore, New York City, John G. Harkins, Jr., David J. Creagan, Harkins Cunningham Philadelphia, PA, for Ikon Office Solutions, Inc., James J. Forese.

Lawrence T. Hoyle, Arlene Fickler, Michael T. Starczewski, Hoyle, Morris and Kerr, Philadelphia, PA, for John E. Stuart, defendant.

Eleanor Morris Illoway, Harkins Cunningham, Philadelphia, PA, Rory O. Millson, Alan J. Hruska, Thomas G. Rafferty, Gerald A. Ford, Miriam Hechler Baer, Andrew G. Gordon, Cravath, Swaine & Moore, New York City, John G. Harkins, Jr., David J. Creagan, Harkins Cunningham, Philadelphia, PA, for Kurt E. Dinkelacker, Michael J. Dillon, movants.

Rory O. Millson, Miriam Hechler Baer, Andrew G. Gordon, Cravath, Swaine & Moore, New York City, for William F. Drake, movant.

Jeffrey H. Lowenthal, Steyer Lowenthal Boodrookas & Walker, San Francisco, CA, for Class Members.

Jacob A. Goldberg, Berger and Montague, P.C., Philadelphia, PA, Lynn Lincoln Sarko, Keller Rohrback, Seattle, WA, for Philadelphia Group, movant.

Jonathan C. Medow, Mayer, Brown and Platt, Chicago, IL, Marc Gary, Gary A. Orseck, Kathryn Schaefer, Lawrence S. Robbins, Lily Fu Swenson, Mayer, Brown & Platt, Washington, DC, Edward M. Posner, Renee Narducci Battisti, Drinker, Biddle & Reath, LLP, Philadelphia, PA, for Ernest & Young, LLP, movant.

E. Graham Robb, Weber Goldstein Greenberg & Gallagher, Philadelphia, PA, for Julia Whetman, Judy Peterson, movant.

Andrew B. Clauss, Cozen and O'Connor, Philadelphia, PA, Charles J. Glasser, Jr., Richard L. Klein, Willkie, Farr & Gallagher, New York City, for Bloomberg News, movant.

Christine G. Boyle, Marks, O'Neill, Reilly, O'Brien & Courtney, PC, Philadelphia, PA, Edward W. Cochran, Shaker Heights, OH, Frank Tomlinson, Pritchard, McCall & Jones, Birmingham, AL, Paul Rothstein, Gainesville, FL, for John M. Guest, Brian G. Chapman, intervenor-plaintiff.

Cary L. Flitter, Lundy, Flitter & Beldecos, P.C., Narberth, PA, Benjamin E. Baker, Jr., John Perry Willis, IL, Hogan Smith & Alspaugh, Birmingham, AL, for Hogan, Smith & Alspaugh, P.C., intervenor-plaintiff.

MEMORANDUM & ORDER

KATZ, Senior District Judge.

This shareholder class action raises a claim of securities fraud under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The plaintiffs have settled with defendant IKON Office Solutions, Inc. (IKON) and the individual defendants named in the complaint.¹ See In re Ikon Office Solutions, Inc. Sec. Litig., 194 F.R.D. 166 (E.D.Pa.2000). The parties have further stipulated to the dismissal of certain allegations against the remaining defendant, IKON's accounting firm, Ernst & Young LLP (E & Y or Ernst). See Order of October 27, 2000. The only remaining claim is the allegation of fraud pertaining to Ernst's unqualified audit opinion on IKON's consolidated, year-end financial statements for fiscal year 1997. These financial statements allegedly overstated pretax income by $54.9 million.

Now before the court is defendant E & Y's motion for summary judgment on the grounds that plaintiffs cannot establish two elements necessary to a Section 10(b) claim: that the accounting firm's actions caused a loss to the plaintiff class, and that the defendant accounting firm acted with the requisite state of mind. E & Y also seeks partial summary judgment on the grounds that liability cannot attach to E &amp Y with respect to a press release issued by IKON.

Summary judgment is granted on the grounds that no genuine issue of material fact has been raised as to either causation or scienter, and E & Y is entitled to judgment as a matter of law. Partial summary judgment with respect to the press release is also granted.

I. Background²

IKON provides copiers, printing systems, and related services throughout the United States, Canada, and Europe. Its shares are publicly traded on the New York Stock Exchange. Between 1995 and 1998, IKON embarked on a "transformation" initiative in which it purchased close to 200 independent companies that it attempted, with some difficulty, to integrate into its own network.

Throughout IKON's fiscal year ending September 30, 1997 (FY97), E & Y performed certain internal audit functions for IKON. Ernst also served as independent auditor of IKON's FY97 consolidated year-end financial statements (the FY97 financial statements). On October 15, 1997, IKON issued a press release regarding its FY97 financial status. On December 24, 1997, Ernst publicly issued its unqualified, or "clean," audit opinion stating that the FY97 financial statements fairly presented IKON's financial position in conformance with professional accounting standards.³ The integrity of this audit opinion is at the heart of the dispute before this court.

The plaintiff class, as revised, encompasses those who acquired IKON's common stock, call options, and/or convertible preferred stock from October 15, 1997 through August 13, 1998, inclusive. See Order of October 5, 2000. From the start of the class period until April 22, 1998, IKON's stock price experienced a net gain. On April 22, 1998, when IKON announced its second quarter 1998 earnings and warned that its third and fourth quarter earnings would fall below expectations, the stock price dropped significantly. It experienced further net decline over the remainder of the spring and summer of 1998.

On May 31, 1998, IKON engaged E & Y to assist in a detailed review of all significant account balances on the books of certain IKON units, an undertaking known as the "Special Procedures." On August 14, 1998, after the conclusion of the Special Procedures, IKON announced a $110 million charge to earnings — $94 million in pre-tax charges applied to its 1998 third fiscal quarter earnings, and a restatement of its previously reported and unaudited 1998 second quarter earnings to reflect $16 million in pre-tax charges. The $110 million in charges consisted of an increase in the lease default reserve of $28 million, an increase in the doubtful accounts receivable reserve of $20 million, adjustments due to the breakdown in internal controls at four operating units totaling $35 million, other adjustments of $7 million, and a loss due to asset impairment of $20 million. These charges were applied to fiscal year 1998 (FY98), not to the FY97 financial statements at issue in this case.

In essence, plaintiffs' complaint is that the FY97 financial statements also overstated pretax income, and that E & Y knew or must have been aware of these overstatements when it issued its "clean" audit opinion with respect to those statements. Plaintiffs thus allege that E & Y violated Section 10(b) and Rule 10b-5 when it opined that IKON's FY97 financial statements conformed with Generally Accepted Accounting Principles (GAAP) and that E & Y's own audit of the FY97 financial statements complied with Generally Accepted Accounting Standards (GAAS).⁴ Plaintiffs claim that two different documents give rise to E & Y's liability: the December 24, 1997 unqualified audit opinion on the FY97 financial statements, and the October 15, 1997 IKON press release, which E & Y allegedly approved prior to its dissemination.

As noted previously, the defendant seeks summary judgment on two alternative grounds. First, the defendant claims that plaintiffs have offered no evidence that the shareholders suffered a loss due to the allegedly fraudulent misstatements, but rather, that the evidence shows that plaintiffs' loss was due to problems unrelated to the misstatements. The defendant also claims that there is no evidence that Ernst acted with scienter in conducting its FY97 audit and issuing its audit opinion. As discussed below, the court finds that plaintiffs have failed to make the requisite showing as to loss causation and, in the alternative, that plaintiffs have failed to make the requisite showing as to scienter. In addition, as noted in the margins, the court also finds, in the alternative, that the October 15, 1997 press release does not form a basis for a Section 10(b) claim, and thus grants defendant's request for partial summary as to the period from October 15,...