In re Lernout & Hauspie Securities Litigation, Civ.A. 00-CV-11589-P (consolidated)<SMALL><SUP>1</SUP></SMALL>.

• Decision Date: 19 June 2002
• Docket Number: No. Civ.A. 00-CV-11589-P (consolidated)&lt;SMALL&gt;&lt;SUP&gt;1&lt;/SUP&gt;&lt;/SMALL&gt;.,Civ.A. 00-CV-11589-P (consolidated)&lt;SMALL&gt;&lt;SUP&gt;1&lt;/SUP&gt;&lt;/SMALL&gt;.
• Citation: 208 F.Supp.2d 74
• Court: U.S. District Court — District of Massachusetts
• Parties: In re LERNOUT & HAUSPIE SECURITIES LITIGATION.

208 F.Supp.2d 74

In re LERNOUT & HAUSPIE SECURITIES LITIGATION.

No. Civ.A. 00-CV-11589-P (consolidated)¹.

United States District Court, D. Massachusetts.

June 19, 2002.

COPYRIGHT MATERIAL OMITTED

Michael G. Lange, Glen DeValerio, Alicia M. Duff, Jeffrey C. Block, Berman, DeValerio & Pease, Boston, MA, Gene Cauley, Steven E. Cauley, W. Todd W. Todd Ver Weire, Curtis L. Bowman, Cauley, Geller, Bowman & Coates, Little Rock, AK, Paul J. Geller, Cauley, Geller, Bowman & Coates, Boca Raton, FL, James P. Bonner, Kenneth A. Ricken, Ralph M. Stone, Lee S. Shalov, Shalov Stone & Bonner, New York City, Robert P. Frutkin, Stuart H. Savett, Barbara A. Podell, Savett, Frutkin, Podell & Ryan, Philadelphia, PA, Bernard M. Gross, Deborah R. Gross, Law Offices of Bernard Gross, Philadelphia, PA, Thomas G. Shapiro, Shapiro, Haber & Urmy LLP, Boston, MA, Richard A. Lockridge, Lockridge Grindal Nauen P.L.L.P., Minneapolis, MN, Lisa J. Rodriguez, Rodriguez & Richards, LLC, Haddonfield, NJ, Thomas L. Earp, Earp Cohn P.C., Westmont, NJ, Michael D. Donovan, David A. Searles, Donovan Searles, LLC, Philadelphia, PA, for plaintiffs.

William R. Moorman, Stephen Wald, Craig & Macauley, P.C., Boston, MA, Kevin J. Lesinski, Arnold P. Messing, Choate, Hall & Stewart, Boston, MA, Michael P. Carroll, William Fenrich, Diem-Suong T. Nguyen, Davis, Polk & Wardwell, New York City, Bruce G. Merritt, Debevoise & Plimpton, New York City, Sanjit S. Korde, James O. Fleckner, James S. Dittmar Hutchins, Wheeler & Dittmar, Boston, MA, Michael A. Collora, David M. Osborne, Dwyer & Collora, Boston, MA, Donald Chase, Franklin R. Weissberg, David A. Piedra, Peter D. Weinstein, Morrison Cohen Singer & Weinstein, LLP, Rachelle L. DeGregory, Morrison Cohen Singer & Weinstein, LLP, New York City, William Shields, Jonathan I. Handler, Day, Berry & Howard, Boston, MA, Bruce A. Baird, Paul W. Schmidt, Jason A. Levine, William D. Iverson, Covington & Burling, Washington, DC, Andrew Good, Silverglate & Good, Boston, MA, Roger E Zuckerman, Steven M. Salky, Zuckerman Spaeder, LLP, Washington, DC, Michael P. Connolly, Murtha Cullina Roche Carens & DeGiacomo, Boston, MA, Robert J. Kaler, Gadsby & Hannah, LLP, Boston, MA, Douglas H. Meal, Ropes & Gray, Boston, MA, David H. Braff, Philip L. Graham, Jr., Bradley A. Harsch, Stephanie G. Wheeler, Sullivan & Cromwell, New York City, Theodore Edelman, Sullivan & Cromwell, London, Vincent M. Amoroso, Erik Lund, Posternak, Blankstein & Lund, Boston, MA, David N. Ellenhorn, Louis M. Solomon, Teresa A. Gonsalves, Solomon, Zauderer Ellenhorn, Frischer & Sharp, New York City, Thomas W. Evans, Janet B. Fierman, Robert M. Cohen, Cohen & Fierman, LP, Boston, MA, John W. Polk, Baker & McKenzie, Washington, DC, John A. Gilmore, Nelson Callahan, Hill & Barlow, Boston, MA, George A. Salter, John A. Redmon, Nicholas W.C. Corson, Hogan & Hartson, LLP, New York City, Sarah E. Walters, Gus P. Coldebella, Anthony M. Feeherry, Goodwin Procter, LLP, Boston, MA, for defendants.

MEMORANDUM AND ORDER

SARIS, District Judge.

This securities class action alleges massive accounting fraud at now-bankrupt Lernout & Hauspie Speech Products, N.V. ("L & H"), a Belgian speech recognition software corporation once touted as the Microsoft of Europe. Lead Plaintiffs assert a fraudulent scheme involving senior officers, directors, various KPMG entities and related corporations that injured purchasers of L & H common stock and stock options on the NASDAQ stock exchange between April 28, 1998 and November 9, 2000.

The 213-page First Consolidated and Amended Complaint ("Complaint")² alleges that defendants overstated by 64%, and in some cases completely fabricated, L & H's revenues and earnings; engaged in a "smorgasbord of accounting irregularities"; and issued materially false and misleading statements concerning the company's financial performance—all in violation of the Generally Accepted Accounting Principles ("GAAP"). Plaintiffs further allege that L & H's outside auditors, various KPMG entities, made fraudulent accounting statements.

Plaintiffs have brought suit against 28 different defendants. Most of these defendants have moved to dismiss the Complaint on the ground that it fails to state a claim under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. No. 104-67 (1995) (codified at 15 U.S.C. § 78u-4 & -5). To address the multiple motions to dismiss, this Court divided the defendants into functional groups, beginning with the "Senior Officers": Jozef Lernout, Pol Hauspie, Gaston Bastiaens, and Nico Willaert.³ After hearing on April 24, 2002, and a review of the extensive briefing, the Senior Officers' Motions to Dismiss are DENIED. The Court also DENIES the Motion to Dismiss on the ground of forum non conveniens filed by defendants Hauspie and Willaert.

I. BACKGROUND

Unless otherwise noted, the facts recited below are drawn from the Complaint. These facts provide an outline of the allegations as they relate to the Senior Officers. Allegations concerning other defendants are not set forth here.

A. Defendants

L & H is a Belgian corporation with its United States executive offices in Burlington, Massachusetts. L & H develops and licenses speech technologies, including speech recognition software. Prior to its Chapter 11 bankruptcy filing on November 29, 2000, L & H was listed and traded on the NASDAQ stock exchange. Plaintiffs have not named L & H as a defendant.

The three individual lead plaintiffs in this action, Quaak, Po, and Leibinger, three Europeans, purchased common stock between April 28, 1998, and November 8, 2000 (the "Class Period"). Plaintiff MM Holdings, Inc. purchased L & H options during the Class Period.

Defendants Jozef Lernout and Pol Hauspie founded L & H in 1987. Lernout and Hauspie both served as Managing Directors of the Board and Co-Chairmen in the Office of the Chief Executive during the entire Class Period, resigning their management positions on the last day of this Period.

Defendant Gaston Bastiaens served as Chief Executive Officer starting in May 1997 and President starting in October 1996, until his resignation from both positions on August 25, 2000. Finally, defendant Nico Willaert served as Managing Director and Vice Chairman of L & H at all times relevant to the Complaint.

B. Material Misstatements

Broadly grouped, plaintiffs' allegations of fraud against the Senior Officers fall into three categories: (1) the massive overstating of L & H revenues and earnings in publicly reported statements and consolidated financial results, resulting from a wide range of improper accounting practices; (2) misleading statements regarding L & H's Korean subsidiary's revenues and earnings and the concealment of its fraudulent accounting practices; and, (3) misleading statements and omissions related to the use of "strategic partner" and related company transactions.

1. Financial Reports

Plaintiffs allege that L & H disseminated false and misleading financial results in the following documents:

(a) Financial press releases of April 28, 1998; July 28, 1998; October 27, 1998; April 7, 1999; May 18, 1999; July 28, 1999; October 27, 1999; February 9, 2000; May 9, 2000; and, August 8, 2000;

(b) Form 6-K Reports of Foreign Private Issuer for: Q1 1998; Q2 1998; Q3 1998; Q4 1998; Q1 1999; Q2 1999; Q3 1999; and, Q1 2000;

(c) Form 10-Q Quarterly Reports for: Q3 1999; Q1 2000; and, Q2 2000;

(d) Form 10-K Annual Report for 1999; and,

(e) Form 20-F Annual Report for 1998.

The overstatements of revenue ranged from approximately $10 million in the first quarter of fiscal year 1998 to over $60 million in the second quarter of fiscal year 2000. L & H eventually restated its financial statements for 1998, 1999, and the first two quarters of 2000, essentially admitting that over $377 million of revenue had been improperly recorded between 1998 and 2000.

The Complaint alleges that L & H, in order to show these overstated revenue and earnings and inflate L & H's stock value, engaged in a panoply of fraudulent schemes. These schemes included:

(a) the recording of revenue from barter and exchange transactions on at least 7 occasions, in violation of GAAP;

(b) prematurely recognizing revenue when no contract was signed or when the terms of the contract were not finalized on at least 7 occasions, in violation of GAAP;

(c) the backdating of a licensing agreement, in violation of GAAP and internal accounting principles;

(d) the recording of revenues from contracts when L & H had reason to doubt the customer had the ability to pay for the ordered products and services on at least 6 occasions, in violation of GAAP and internal accounting principles;

(e) the recording of revenue from sales subject to contingencies on at least 4 occasions, in violation of GAAP;

(f) the recording of revenue from a licensing agreement subject to a side agreement giving the purchaser a money-back-plus-interest guarantee if the purchaser could not resell the license;

(g) the recording of revenue from sales where the customer had a right to return the purchased product and where the customer never in fact gave L & H any money, on at least 2 occasions, in violation of GAAP;

(h) the recording of revenue from "sales" in which L & H intended to reimburse the licensee in violation of GAAP; and,

(i) the knowing shipment of non-working products, in order to make year-end numbers.

2. The Korean Fraud

Plaintiffs also allege that L & H manufactured earnings and revenue overstatements through accounting irregularities and blatant fraud relating to its Korean subsidiary. L & H purchased systems-development company Bumil Information & Communications, Co. in September 1999, renaming it L & H Korea. Between September 1999 and June 30, 2000, L & H recorded nearly $160 million in licensing revenue in Korea. The plaintiffs allege that every dollar of this revenue was fictitious.

Plaintiffs essentially make three...