In re Livent, Inc. Securities Litigation
| Decision Date | 29 June 2001 |
| Docket Number | No. 98 CIV. 5686(VM).,98 CIV. 5686(VM). |
| Citation | 148 F.Supp.2d 331 |
| Parties | In re LIVENT, INC. SECURITIES LITIGATION. This document relates to all actions. |
| Court | U.S. District Court — Southern District of New York |
This case is one of numerous securities class actions that arose out of the events surrounding the collapse of Livent, Inc. ("Livent"). The particular action now before the Court is brought on behalf of Livent stockholders who purchased or otherwise acquired Livent common stock between March 5, 1996 and August 7, 1998 (the "Class Period") and has been the subject of a prior published decision of this Court, In re Livent Sec. Litig., 78 F.Supp.2d 194 (S.D.N.Y.1999) (Sweet, J.) ("Livent Shareholders I"), familiarity with which is assumed.1
In August 1998, the first of many shareholder actions was brought against Livent and associated individuals and entities. In December 1998, Judge Sweet consolidated the pending actions and approved lead plaintiffs and counsel. In February 1999, plaintiffs herein ("the Shareholders") filed an amended class action complaint against several groups of defendants: Livent's two highest officers, Garth Drabinsky and Myron Gottlieb (the "Inside Directors"); three directors who served on Livent's audit committee, H. Garfield Emerson, A. Alfred Taubman, and Martin Goldfarb (the "Outside Directors" or "Audit Committee"); and Livent's accounting firm, Deloitte & Touche Chartered Accountants ("D & T").
The defendants moved to dismiss on various grounds. In December 1999, Judge Sweet held that: (1) dismissal of the action on forum non conveniens grounds was not warranted; (2) allegations of fraudulent conduct by Drabinsky and Gottlieb were sufficiently particular to state securities fraud claims; (3) the magnitude of alleged accounting fraud was insufficient to infer scienter on the part of D & T; (4) the allegations that the Outside Directors, who as members of the Audit Committee failed to discover various fraudulent schemes by the Inside Directors, were insufficient to plead scienter; and (5) the fact that the Outside Directors were members of the Audit Committee was insufficient to establish that such directors had the control required to satisfy the criteria for "control person" liability under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (the "Exchange Act" or "1934 Act").
Judge Sweet granted leave to re-plead, and in February 2000, the Shareholders filed the Second Amended Consolidated Class Action Complaint ("SH SAC") now before the Court. Among its changes, the SH SAC for the first time named Canadian Imperial Bank of Commerce ("CIBC"), a major Livent lender and investment banker, as a defendant.
In three separate motions, D & T, CIBC, and the Outside Directors now move to dismiss the SH SAC under Fed. R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995, (the "PSLRA" or the "1995 Reform Act"), Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§ 77z1-77z2, 78u4- 78u5), for failure to plead fraud with particularity and under Rule 12(b)(6) for failure to state a claim for which relief can be granted. For the reasons that follow, the motions are denied in part and granted in part.
The circumstances upon which the Shareholders' claims of fraud are grounded generally fall into two categories; first, certain transactions Livent executed, the accounting for which overstated income; and second, manipulation of Livent's books and records that understated expenses. Some of the claims target the roles of particular defendants in the underlying the events.
In 1996 and 1997, Livent purported to sell Pace Theatrical Group, Inc. ("Pace"), a Texas-based theatrical company, the exclusive rights to present "Show Boat" and "Ragtime" in various theaters in North America for fees totaling $11.2 million (U.S.). SH SAC ¶ 50. These agreements, contained in contracts or letters, were dated June 15, 1996 and August 8, 1997, with respect to "Show Boat," and December 18, 1996 and August 8, 1997, with respect to "Ragtime." SH SAC ¶ 50. In return for payment of the fees, Pace was to be reimbursed for all theater expenses to present the shows and was entitled to a limited percentage of adjusted gross ticket sales as profit participation. SH SAC ¶ 50. All of these agreements purported to make the fees nonrefundable, even if Livent never made the shows available to Pace.2
The Shareholders allege that pursuant to the terms of the agreements, Livent would not commence staging "Show Boat" until July 1997 and would be responsible for all production costs, running costs and moving costs throughout the tour. SH SAC ¶ 52. Similarly, according to the Shareholders, Livent assumed obligations with respect to the "Ragtime" agreement for substantial performance that would extend beyond 1996 and 1997. SH SAC ¶ 53.
Nevertheless, on the basis of these agreements, and allegedly in violation of Generally Accepted Accounting Principles ("GAAP"), Livent recognized the present value of the fees as revenue in its financial statements in the amounts of $12.2 million for fiscal 1996 and $1.6 million for fiscal 1997. SH SAC ¶ 51. For purposes of Livent's year-end 1996 reconciliation to U.S. GAAP, Livent deferred recognition of $6 million related to the sale of rights to "Ragtime." SH SAC ¶ 51. Livent subsequently improperly recognized that amount in fiscal 1997. SH SAC ¶ 51.
In 1997, pursuant to an agreement dated September 9, 1997, Livent sold American Artists Limited Inc. ("American Artists"), a Massachusetts-based theater owner and operator, the right to present "Ragtime" in three theaters for a fee of $4.5 million (U.S.). SH SAC ¶ 86. The agreement purported to make the fee nonrefundable, regardless of whether Livent made "Ragtime" available to American Artists. SH SAC ¶ 86.
The Shareholders allege that the American Artists contract contained terms which made it clear that Livent could not fulfill all significant obligations in 1997, so that the full amount of revenue should not have been recognized in 1997. SH SAC ¶ 86.
In December 1997, Gottlieb negotiated an agreement purporting to memorialize the sale of an interest in the production rights of "Show Boat" and "Ragtime" in the United Kingdom and other countries to CIBC Wood Gundy, an investment bank and subsidiary of CIBC, Livent's principal banker. SH SAC ¶ 87. In return, CIBC Wood Gundy was entitled to certain royalty payments from the shows. SH SAC ¶ 87. Valued at $4.6 million (Can.) or £2 million, the agreement also gave Livent the right, until June 30, 1998, to repurchase the production rights. SH SAC ¶ 87. Based on this agreement, Livent recorded revenue of approximately $4.6 million (Can.) in its financial statements for fiscal 1997. SH ¶ 87.
According to the Shareholders, the CIBC Wood Gundy contract was reviewed by D & T as part of its 1997 audit of Livent....
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