In re Livent, Inc. Noteholders Securities Litig.

• Decision Date: 29 June 2001
• Docket Number: No. 99 CIV. 9425(VM).,No. 98 CIV. 7161(VM).,98 CIV. 7161(VM).,99 CIV. 9425(VM).
• Citation: 151 F.Supp.2d 371
• Parties: In re LIVENT, INC. NOTEHOLDERS SECURITIES LITIGATION. This document relates to all actions. Alice F. Rieger, acting by and through her attorney-in-fact Robert L. Walters, Tri-Links Investment Trust, and Cerberus Capital Management, L.P., individually and on behalf of all others similarly situated, Plaintiffs, v. Garth Drabinsky, Myron I. Gottlieb, Gordon Eckstein, Robert Topol, Conrad M. Black, Joseph Rotman, Scott M. Sperling, H. Garfield Emerson, Martin Goldfarb, A. Alfred Taubman, Estate of Andrew Sarlos, Thomas H. Lee, James Pattison, Lynx Ventures, L.P., Lynx Ventures, L.L.C., Michael S. Ovitz, Ronald W. Burkle, Robert M.D. Cross, Quincy Jones, Heather Munroe-Blum, Jerry I. Speyer, Furman Selz, Inc., Roy Furman, Paine Webber, Inc., Deloitte & Touche, L.L.P., Deloitte & Touche Chartered Accountants, Canadian Imperial Bank of Commerce, CIBC World Markets, CIBC Capital Partners, CIBC Wood Gundy Securities, Inc., CIBC Wood Gundy Capital, and CIBC Oppenheimer Securities Corp., Defendants.
• Court: U.S. District Court — Southern District of New York

151 F.Supp.2d 371

In re LIVENT, INC. NOTEHOLDERS SECURITIES LITIGATION This document relates to all actions Alice F. Rieger, acting by and through her attorney-in-fact Robert L. Walters, Tri-Links Investment Trust, and Cerberus Capital Management, L.P., individually and on behalf of all others similarly situated, Plaintiffs, v. Garth Drabinsky, Myron I. Gottlieb, Gordon Eckstein, Robert Topol, Conrad M. Black, Joseph Rotman, Scott M. Sperling, H. Garfield Emerson, Martin Goldfarb, A. Alfred Taubman, Estate of Andrew Sarlos, Thomas H. Lee, James Pattison, Lynx Ventures, L.P., Lynx Ventures, L.L.C., Michael S. Ovitz, Ronald W. Burkle, Robert M.D. Cross, Quincy Jones, Heather Munroe-Blum, Jerry I. Speyer, Furman Selz, Inc., Roy Furman, Paine Webber, Inc., Deloitte & Touche, L.L.P., Deloitte & Touche Chartered

Accountants, Canadian Imperial Bank of Commerce, CIBC World Markets, CIBC Capital Partners, CIBC Wood Gundy Securities, Inc., CIBC Wood Gundy Capital, and CIBC Oppenheimer Securities Corp., Defendants.

No. 98 CIV. 7161(VM).

No. 99 CIV. 9425(VM).

United States District Court, S.D. New York.

June 29, 2001.

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Stanley M. Grossman, Patrick V. Dahlstrom, Pomerantz, Haudek, Block, Grossman & Gross, LLP, New York City, Lionel Z. Glancy, Peter A. Binkow, Los Angeles, CA, Donald R. Wager, Los Angeles, CA, for Plaintiffs.

Harvey L. Pitt, Fried, Frank, Harris, Shriver & Jacobson, New York City, for Garth H. Drabinsky.

Lee S. Richard, Richards, Spears, Kibbe & Orbe, New York City, for Myron I. Gottlieb.

James S. Dittmar, Sanford F. Remz, Hutchins, Wheeler & Dittmar, Boston, MA, for Joseph L. Rotman.

D. Brian Hufford, Pomerant, Haudek, Block, Grossman & Gross, LLP, New York City, for Gordon Eckstein, H. Garfield Emerson, A. Alfred Taubman, and CIBC Oppenheimer.

D. Brian Hufford, Pomerant, Haudek, Block, Grossman & Gross, LLP, New York City, Cynthia A. Geigin, W. Sidney Davis, Hogan & Hartson, L.L.P., New York City, for Robert Topal.

Jonathon Rosenberg, O'Sullivan, L.L.P., New York City, for Martin Goldfarb.

DECISION AND ORDER

MARRERO, District Judge.

                Page
                TABLE OF CONTENTS
                I. INTRODUCTION                                      383
                                                    II. THE PARTIES                                      385
                A. PLAINTIFFS ...........................................................................385
                B. DEFENDANTS ...........................................................................385
                    1. Inside Directors/Management Defendants ...........................................385
                    2. Outside Directors ................................................................386
                    3. Securities Sellers ...............................................................387
                    4. Auditors .........................................................................388
                    5. Nominal Defendants ...............................................................388
                

                    6. Additional Rieger Action Defendants...............................................388
                                          III. LIVENT'S BACKGROUND AND DEMISE                            389
                A. PUBLIC FINANCINGS AND LOSSES .........................................................389
                B. LIVENT'S FRAUD UNCOVERED .............................................................390
                C. LIVENT'S BANKRUPTCY ..................................................................391
                D. THE INSTANT ACTIONS ..................................................................392
                    1. The Noteholders' Action ..........................................................392
                    2. The Rieger Action ................................................................392
                                                 IV. THE ALLEGED FRAUD                                   393
                A. FRAUDULENT "REVENUE-GENERATING" TRANSACTIONS .........................................393
                    1. Pace Theatrical Group ............................................................393
                    2. American Artists .................................................................393
                    3. CIBC Wood Gundy ..................................................................393
                    4. Dundee Realty Corporation ........................................................395
                    5. Pantages Theatre Naming Rights ...................................................396
                    6. Dewlim Investments Limited .......................................................397
                B. FRAUDULENT MANIPULATION OF LIVENT'S BOOKS AND RECORDS ................................398
                C. THE UNDISCLOSED KICKBACKS ............................................................401
                D. OTHER FRAUDULENT CONDUCT .............................................................401
                    1. Livent's Fraudulent Ticket Purchases .............................................401
                    2. Allegations Specific to Deloitte .................................................402
                                                     V. DISCUSSION                                       403
                A. LEGAL STANDARDS: MOTION TO DISMISS UNDER FED. R. CIV. P
                    12(B)(6) ............................................................................404
                B. THE SECURITIES LAWS ..................................................................407
                    1. The 1933 Securities Act ..........................................................408
                       a.  Section 11 ...................................................................408
                       b.  Section 12(a)(2) .............................................................409
                       c.  Section 15 ...................................................................409
                    2. The Securities Exchange Act ......................................................409
                

                       a.  Section 10(b) and SEC rule 10b-5 .............................................409
                       b.  Section 20(a) ................................................................413
                    3. The 1995 Reform Act ..............................................................418
                       a.  Pleading Standards ...........................................................418
                       b.  Policy and Procedural Objectives .............................................422
                               VI. APPLICATION OF THE SECURITIES STATUTES TO PLAINTIFFS'
                                                         CLAIMS                                          426
                A. THE NOTEHOLDERS' ACTION ..............................................................426
                    1. Deloitte's Motion: Section 10(b) .................................................426
                       a.  The Revenue-Generating Transactions ..........................................426
                           (i) The Dundee Transaction ...................................................427
                          (ii) CIBC Wood Gundy Transaction ..............................................428
                       b. Livent's Manipulation of Its Books and Records ................................428
                    2. Deloitte's Motion: Section 11 Liability and Rule 9(b) Pleading Requirement .......429
                    3. PaineWebber, Furman Selz, and CIBC Motion: Section 11 Claim ......................430
                    4. PaineWebber/Furman Selz Motion: Section 12 Claim .................................432
                    5. CIBC Wood Gundy and CIBC Oppenheimer's Motion: Section 10(b)
                        Claims ..........................................................................432
                    6. CIBC Motion: Section 12(a)(2) Claim ..............................................433
                    7. Outside Directors Motion to Dismiss: Section 10(b) Claim .........................433
                    8. Outside Directors' Motion: Section 11 Claims .....................................434
                       a.  Rule 9(b) ....................................................................434
                       b. Standing ......................................................................434
                    9. Outside Directors' Motion: §§ 12 and 15 Claims .........................436
                   10. Outside Directors' Motion: § 20(a) Claims ...................................436
                B. THE RIEGER ACTION ....................................................................437
                    1. Status of Plaintiff Rieger .......................................................438
                    2. Motion to Dismiss: § 10(b) Claims ...........................................438
                       a.  Reliance .....................................................................438
                       b.  Forward Looking Statements and Safe Harbor Analysis ..........................440
                

                    3. Motion to Dismiss: Claims Under Section 11 and 12(a)(2) ..........................441
                    4. Motion to Dismiss: Claims, Under Sections 15 and 20(a) ...........................441
                       a. State Claims and the Securities Litigation Uniform Standards Acts .............442
                       b. Motion to Strike the Answer of Drabinsky, Ekstein, and Gottlieb and
                           for Judgment on the Pleadings ................................................443
                                                       VII. ORDER                                        445
                A. THE NOTEHOLDERS' ACTION, 98 CIV. 7161 ................................................445
                B. THE RIEGER ACTION, 99 CIV. 9425 ......................................................445
                

Livent, Inc. ("Livent") was once a well-known and seemingly successful producer of live theater on Broadway and around the world. Its credits include critically acclaimed musicals such as "Show Boat," "Fosse," "Phantom of the Opera," and "Ragtime." In November 1998, however, amid revelations of accounting fraud implicating its highest officers, Livent restated financial results for 1996, 1997, and the first quarter of 1998 by nearly $100 million. At the same time, the company declared bankruptcy in the United States and Canada.

The litigation spawned by Livent's demise includes two competing noteholders class actions now before this Court.¹ The first, In re Livent, Inc....