In re Lernout & Hauspie Securities Litigation
| Decision Date | 19 August 2002 |
| Docket Number | No. Civ.A. 02-CV-10302-PB.,No. Civ.A. 00-CV-11589-PB.,No. Civ.A. 02-CV-10303-PB.,No. Civ.A. 02-CV-10304-PB.,Civ.A. 00-CV-11589-PB.,Civ.A. 02-CV-10302-PB.,Civ.A. 02-CV-10303-PB.,Civ.A. 02-CV-10304-PB. |
| Citation | 230 F.Supp.2d 152 |
| Court | U.S. District Court — District of Massachusetts |
| Parties | In re LERNOUT & HAUSPIE SECURITIES LITIGATION. Gary B. Filler, et al., Plaintiffs, v. Jo Lernout, et al., Defendants. Stonington Partners, Inc., et al., Plaintiffs, v. Carl Dammekens, et al., Defendants. Paul G. Bamberg, et al., Plaintiffs, v. KPMG, LLP, et al., Defendants. Janet Baker, et al., Plaintiffs, v. KPMG, LLP, et al., Defendants. |
Richard E. Bennett, Jack R. Pirozzolo, James J. Nicklaus, Wilcox, Pirozzolo & McCarty, Boston, MA, Arthur G. Connolly, III, Connolly, Bove, Lodge & Hutz, Wilmington, DE, for Paul G. Bamberg, Robert Roth, Donald B. Fletcher, Cherry F. Bamberg.
Terence K. Ankner, Kenneth J. Fishman, Bailey, Fishman & Leonard, Boston, MA, Kurt F. Gwynne, John G. Harris, Reed Smith LLP, Wilmington, DE, Karen C. Dyer, Boies, Schiller & Flexner LLP, Orlando, FL, Robert A. Nicholas, Michael T. Scott, Alan K. Cotler, Sean M. Halpin, Tracy Zurzolo-Frisch, Joan A. Yue, Reed Smith, LLP, Philadelphia, PA, for Janet Baker, James Baker, JK Baker LLC, JMBaker, LLC.
Susan E. Kaufman, Heiman, Aber, Goldlust & Baker, Wilmington, DE, for Jo Lernut.
Pamela E. Berman, Bryan A. Wood, Schnader, Harrison, Goldstein & Manello, Boston, MA, Daniel Waxman, Eric Rieder, Bryan Cave, LLP, New York City, for Roel Pieper.
John A. Gilmore, Nelson Callahan, Hill & Barlow, Boston, MA, for Bernard Berngnes.
Stephen E. Jenkins, Ashby & Geddes, Wilmington, DE, Douglas F. MacLean, Latham & Watkins, Newton, MA, Peter W. Devereaux, Latham & Watkins, Los Angeles, CA, for KPMG Intern.
Lewis H. Lazarus, Morris, James, Hitchens & Williams, Wilmington, DE, for KPMG U.S.
David H. Braff, Bradley A. Harsch, Philip L. Graham, Jr., Stephanie G. Wheeler, Sullivan & Cromwell, New York City, Theodore Edelman, Sullivan & Cromwell, London, England, Douglas H. Meal, Emily F. Klineman, Ropes & Gray, Boston, MA, for KPMG UK.
Kevin R. Shannon, Potter, Anderson & Corroon, LLP, Wilmington, DE, for KPMG Belgium.
Matthew J. Matule, Skadden, Arps, Slate, Meagher & Flom, Boston, MA, Paul J. Lockwood, Skadden, Arps, Slate, Meagher & Flom, Wilmington, DE, George A. Zimmerman, Joanne Gaboriault, Skadden, Arps, Slate, Meagher, & Flom, LLP, New York City, for SG Cowen Securities Corp.
Henry A. Heiman, Heiman, Aber Goldlust & Baker, Wilmington, DE, for Jo Lernout.
James S. Dittmer, James O. Fleckner, Hutchins, Wheeler & Dittmer, Boston, MA, for Pol Hauspie, Nico Willaert.
Thomas W. Evans, Janet B. Fierman, Robert M. Cohen, Cohen & Fierman, LLP, Boston, MA, for Mercator & Noordstar NV.
Gregg Shapiro, Kevin J. Lesinski, Choate, Hall & Stewart, Boston, MA, Michael P. Carroll, William Fenrich, Davis, Polk & Wardwell, New York City, for KPMG, LLP.
Robert J. Kaler, Gadsby & Hannah, LLP, Boston, MA, for Flanders Language Valley Foundation.
These actions involve a dispute over the proper standard for evaluating the liability of an outside independent auditor for widespread accounting fraud by senior officers of a corporation. In this securities class action and the three related cases, Plaintiffs allege that various affiliated KPMG entities committed accounting fraud at now-bankrupt Lernout & Hauspie Speech Products, N.V. ("L & H"), a Belgian speech recognition software corporation. The defendant KPMG entities are KPMG Bedrijsrevisoven in Belgium ("KPMG Belgium")1, KPMG LLP in the United States ("KPMG US")2, KPMG in Great Britain ("KPMG UK")3, KPMG in Singapore ("KPMG Singapore")4; and the international association ("KPMG International")5 of which the other defendants are all members.6
All plaintiffs allege that KPMG Belgium should be held liable as a primary violator for issuing signed, unqualified audit opinions in 1998 and 1999, allegedly with actual knowledge, or reckless disregard, of false and misleading information contained in L & H's quarterly and annual reports. None of the other KPMG defendants signed the audit report. However, all plaintiffs argue that the involvement of KPMG UK and KPMG U.S. in conducting audits and preparing L & H's financial disclosures also triggers primary liability.7 One of the Dragon and Dictaphone shareholders also names KPMG Singapore as a defendant for its alleged provision of false audit information to KPMG Belgium. Another of the Dragon and Dictaphone shareholders names KPMG International as a defendant on a theory of vicarious liability.
The KPMG entities have moved to dismiss the Complaints on the ground that they fail 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). After hearing on June 13, 2002, and a review of the extensive briefing, the Motions by KPMG U.S. and KPMG Belgium to Dismiss are DENIED. The Motions by KPMG Singapore, KPMG International, and KPMG UK are ALLOWED.
Unless otherwise noted, the facts recited below are drawn from the Lead Plaintiffs' First Consolidated and Amended Class Action Complaint.8 This Court's earlier opinion in this case, In re Lernout & Hauspie Sec. Litig., 208 F.Supp.2d 74 (D.Mass. 2002) ("Lernout I"), analyzes in detail the general allegations of fraud against the Senior Officers of L & H, and the sequence of events leading up to the company's downfall in the fall of 2000. Familiarity with that opinion is assumed. The facts provided here focus only on those allegations that relate directly to the KPMG 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. Filler, Baker, and Bamberg are former shareholders of Dragon Systems, Inc. who exchanged their shares for L & H stock as part of L & H's merger with Dragon in June 2000. Stonington plaintiffs are entities that sold L & H their 96% ownership stake in Dictaphone in May 2000 in exchange for L & H stock.
Several KPMG partners were prominent in assisting L & H during the class period. William Van Aerde, Paul Behets, and Stefan Huysman were among KPMG Belgium's principal auditors. Robert McLamb, a KPMG U.S. partner, worked at the KPMG UK office until January 2000 (¶¶ 233, 277), and then transferred to KPMG US. James Boyer was the KPMG U.S. partner in charge of assisting L & H from the Boston office.
KPMG Belgium became L & H's outside auditor in 1991, when KPMG acquired the Belgium accounting firm of Behets, Boes & Co. Plaintiffs allege that various KPMG offices were exposed to an escalating pageant of "red flags" from 1998 to 2000, plainly indicating that misconduct was afoot. During the same period, KPMG defendants allegedly helped L & H to carry out securities fraud by issuing "clean" or unqualified audit reports, and by helping L & H draft various financial disclosures filed with the SEC.
Plaintiffs place relatively little emphasis on KPMG's activities during the years 1997 and 1998. During both years, two KPMG offices (Belgium and US) were described as L & H's principal auditors on its Annual Reports to Shareholders. (¶ 229). KPMG offices are also alleged to have "actively participated" in reviews and audits of L & H financial statements. (Id.). Plaintiffs point to one occasion on which a KPMG auditor expressed concern about L & H's conformity with U.S. GAAP. Specifically, on October 19, 1998, Virginia-based KPMG U.S. auditor David Milligan sent an e-mail to Boyer (the KPMG U.S. partner based in Boston) expressing doubt that Globalink, a L & H subsidiary, was complying with U.S. GAAP "in material respects." (¶ 299). Plaintiffs do not cite with particularity any other instances where KPMG officials were directly informed (or informed others) of financial improprieties during those years.
L & H's alleged fraud — and KPMG defendants' participation — began gathering momentum in the spring and summer of 1999. On April 9, 1999, KPMG Belgium signed a "clean" audit opinion on L & H's 1998 financial disclosures to the SEC. Like many standard, unqualified audit opinions, the report consisted of three short paragraphs — the introduction, the scope, and the opinion — reciting in boilerplate language that KPMG conducted its audit "in accordance with generally accepted auditing standards" and that in its opinion, L & H's financial statements were "present[ed] fairly, in all material respects ... in conformity with generally accepted accounting principles." (¶ 79). See Charles R. Wright, Understanding and Using Financial Data 82 (1996); American Institute of Certified Public Accountants, Understanding Audits and the Auditor's Report: A Guide for Financial Statement Users 16 (1996). KPMG Belgium agreed to append a copy of the opinion to L & H's 1998 Annual Report on Form 20-F, which was filed with the SEC on June 30, 1999. Moreover, throughout this period, KPMG auditors allegedly helped L & H prepare its annual and quarterly financial statements (although the quarterly filings were not subjected to a formal, publicly disclosed audit). (¶ 235). L & H eventually conceded that FY98 revenues reported on Form 20-F were overstated by 15%. (¶ 313).
Also beginning in the summer of 1999, "red flags" regarding L & H's financial improprieties began waving before various...
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