In re Pss World Medical, Inc. Securities Lit.
| Decision Date | 01 August 2002 |
| Docket Number | No. 301CV795J16TEM.,301CV795J16TEM. |
| Citation | 250 F.Supp.2d 1335 |
| Parties | In re PSS WORLD MEDICAL, INC. SECURITIES LITIGATION This Document Relates To: All Actions |
| Court | U.S. District Court — Middle District of Florida |
Kenneth Vianale, Milberg, Weiss, Bershad, Hynes & Lerach, Boca Raton, Jack G. Fruchter, Fruchter & Twersky, New York, NY, for Robert J. Bordeaux, plaintiff.
Michael Robert Cavendish, McGuire-Woods LLP, David M. Wells, McGuire-Woods LLP, Jacksonville, Stephen W. Greiner, Jeanne M. Luboja, David M. Stark, Laila Abou-Rahme, Willkie Farr & Gallagher, New York, NY, for PSS World Medical Inc., David A. Smith, Patrick C. Kelly, Frederick E. Dell, defendants.
Before the Court is Defendants' Motion to Dismiss Amended Class Action Complaint and Incorporated Memorandum of Law (Dkt.36). Plaintiffs filed a Memorandum of Law in Opposition to Defendants' Motion to Dismiss Class Action Complaint (Dkt.40). The Court heard oral arguments from the parties concerning the Defendants' Motion on July 12, 2002 (Dkt.44).
The Plaintiffs originally filed a Class Action Complaint in this case on July 13, 2001 (Dkt.1), and they filed an Amended Class Action Complaint on March 22, 2002 (Dkt.29). In their Amended Complaint, the Plaintiffs purport to bring a class action on behalf of all persons and entities who purchased stock from PSS World Medical, Inc. ("PSSI") between October 26, 1999 and October 3, 2000, which the parties term the "Class Period" (Dkt. 29, ¶ 1). The Defendants in this case are PSSI, a marketer and distributor of medical products, and certain of its executive officers and directors in their individual capacities (the "Individual Defendants").1 This Court entered a consolidation Order on January 14, 2002, consolidating the above-captioned case with nine other cases and appointing lead counsel (Dkt.22). However, the Court has never certified a class in this action.
In essence, the Plaintiffs allege that the Defendants' misrepresentations during the Class Period caused PSSI's stock to be artificially inflated (Dkt.29, ¶ 3). Ultimately, several high-ranking officers left PSSI after the company announced that its earnings for the quarter ended September 30, 2000 would in fact be below analysts' expectations. Id. at ¶ 2. The Plaintiffs allege that the Defendants utilized several misleading and fraudulent measures in an effort to make the company's earnings look more attractive in the short term, including the following:
1) Keeping quarters open for a period of time after the quarter had ended in order to report shipments of goods that actually occurred in the following quarter;
2) Improperly recognizing revenue on transactions where products were either not shipped or the company continued to have substantial obligations with regard to the products;
3) Failing to properly reserve for uncollectible accounts receivable;
4) Improperly collecting and accounting for rebates from vendors; and
5) Improperly failing to record employee bonuses.
Id. at 114. The Plaintiffs further allege that these measures constitute violations of generally accepted accounting principles ("GAAP"), had the effect of inflating the value of PSSI's stock through misrepresentation, and that the Individual Defendants were in positions to and did in fact control such practices.
Additionally, the Plaintiffs allege that the Defendants were motivated to make misrepresentations regarding PSSI's earnings by the company's proposed merger with Fisher Scientific International, Inc. ("Fisher"). However, due to the income overstatements in violation of GAAP, the Plaintiffs claim Fisher terminated the merger agreement. Id. at 1114. Then, following the company's restatement of earnings on September 30, 2000, the Plaintiffs allege that PSSI's stock value drastically declined. Id.
More specifically, the Plaintiffs provide allegations of the exact statements they contend were false and misleading at pages 10-25 of the Amended Complaint. These allegedly false and misleading statements, and the Defendants' allegedly fraudulent course of conduct, can be briefly summarized as follows:
1. An October 26, 1999 press release announcing that PSSI was reporting "record results" in the form of revenue and profit increases, as well as a Form 10-Q filed with the SEC for the quarter ending September 30, 1999 which were false and misleading in that they improperly recognized revenue not earned during the quarter and materially overstated revenue and income for the quarter, in violation of GAAP.
2. A January 24, 2000 press release announcing the company's results for the quarter ending December 31, 1999 and a Form 10-Q filed with the SEC on February 14, 2000 reporting the same results, both of which were false and misleading in that they improperly recognized revenue on transactions, overstated PSSI's income, failed to provide for uncollectible receivables, recognized contingent income, otherwise violated GAAP, and failed to acknowledge that the company's worse than expected results were caused by a deterioration of business.
3. A June 22, 2000 press release announcing fiscal 2000 year-end results showing an increase in net sales and income as well as the definitive merger with Fisher and a Form 10-K filed with the SEC on June 23, 2000 reporting the same results. These statements were materially false and misleading in that they again inflated the company's revenue, improperly failed to account for uncollectible receivables from customers in dire financial condition, improperly recognized contingent income, and understated PSSI's net loss for fiscal year 2000. Additionally, the press release was false and misleading because it concealed the fact that the merger with Fisher was based on the above fraudulent income reports for fiscal 2000. Due to the non-disclosure of material facts, Plaintiffs allege that the investment community falsely relied on PSSI's ability to merge with Fisher, thus further inflating the value of PSSI's stock.
4. An August 8, 2000 press release reporting financial results for the quarter ending June 30, 2000 announcing that sales had increased and the financial requirements of the merger agreement with Fisher had been met, causing Fisher to issue a similar press release, and an August 10, 2000 Form 10-Q in which PSSI reported the same financial results. The Plaintiffs claim these documents were false and misleading because the true financial results of PSSI that were required as part of the merger agreement were not reflected, operating and net income were inflated based on PSSI's subsequent restatement of March 31, 2001, revenue was again contingent and improperly recognized, income was overstated, extensive uncollectible receivables were not accurately reported, and accruals of bonuses were not reported, all in violation of GAAP. Ultimately, Plaintiffs allege that these financial results were ultimately restated to reduce sales, income and accounts receivable. As a result of Fisher's investigation of PSSI's books, Plaintiffs allege that the merger agreement was terminated in September 2000 and PSSI's stock value subsequently drastically declined.
Id. at ¶¶ 26-49. The Plaintiffs then go on to allege that at the end of the class period, officers of PSSI resigned and the company's earnings were subsequently restated substantially reducing the company's net income and causing the stock value to drastically decline. Id. at UU 50-54.
The Plaintiffs claim that as in this case, statements filed with the SEC that are not in compliance with the GAAP are presumed to be inaccurate and misleading. Id. at ¶ 55. As such, because the Defendants knowingly violated GAAP on several occasions in their filings with the SEC and in press releases, necessitating a later restatement, the Plaintiffs allege the Defendants are liable for such fraudulent misrepresentations. The Plaintiffs detail the Defendants' alleged violations of accounting principles, which they claim had the effect of misleading the investing public, at paragraphs 60 and 61 of their Amended Complaint. They further allege that through their accounting violations, the Defendants violated a number of SEC rules throughout the class period, and accordingly should be liable for such violations. Id. at ¶ 63.
At pages 33 through 37 of their Amended Complaint, the Plaintiffs make their scienter allegations against the Defendants. The Plaintiffs claim that the Individual Defendants controlled and possessed the power to control the contents of PSSI's financial statements and press releases, and that they either knew of or recklessly disregarded "the adverse, nonpublic information about PSSI's business and operations as well as its finances, markets and present and future business prospects." Id. at 111164-65. The Plaintiffs further allege that the individual Defendants had a duty to accurately report and disseminate financial information about the company, and to accurately recognize and report revenues in accordance with GAAP. Id. at 66. The Defendants' misrepresentations and omissions during the Class Period allegedly violated these duties. Id.
The Plaintiffs then provide more detail concerning these allegations with regard to each individual Defendant, claiming that each was involved in drafting and disseminating both press releases and SEC filings during the reporting periods detailed above, and as such each was aware of or recklessly disregarded the inaccurate financial information, misrepresentations, and violations of GAAP. See id. at ¶¶ 67-69. Additionally, the Plaintiffs claim that the Individual Defendants engaged in a "scheme, common enterprise or common course of conduct to artificially inflate and/or maintain the price of PSSI's stock" when they issued statements that "portrayed a false picture of the Company's business and operations and misrepresented and/or...
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