In re Rospatch Securities Litigation

• Citation: 760 F. Supp. 1239
• Decision Date: 10 April 1991
• Docket Number: 1:90-cv-806,This order relates to Case No. 1:90-cv-805,1:90-cv-807,No. 1:90-CV-805 to 1:90-CV-807 and 1:91-CV-085.,1:90-CV-805 to 1:90-CV-807 and 1:91-CV-085.
• Parties: In re ROSPATCH SECURITIES LITIGATION. ATLANTIS GROUP, INC., Plaintiff, v. ROSPATCH CORPORATION, et al., Defendants. PLATO PAPER PRODUCTS, INC., Plaintiffs, v. ROSPATCH CORPORATION, et al., Defendants. Jerry ATCOVITZ, Plaintiff, v. J. Grant BEADLE, et al., Defendants. Alan FREBERG, Plaintiff, v. ROSPATCH CORPORATION, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

760 F. Supp. 1239

In re ROSPATCH SECURITIES LITIGATION.

ATLANTIS GROUP, INC., Plaintiff, v. ROSPATCH CORPORATION, et al., Defendants.

PLATO PAPER PRODUCTS, INC., Plaintiffs, v. ROSPATCH CORPORATION, et al., Defendants.

Jerry ATCOVITZ, Plaintiff, v. J. Grant BEADLE, et al., Defendants.

Alan FREBERG, Plaintiff, v. ROSPATCH CORPORATION, et al., Defendants.

This order relates to Case Nos. 1:90-cv-805, 1:90-cv-806, 1:90-cv-807, Nos. 1:90-CV-805 to 1:90-CV-807 and 1:91-CV-085.

United States District Court, W.D. Michigan, S.D.

March 14, 1991.

As Amended April 10, 1991.

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Theodore Souris, James Albert Smith, Bodman, Longley & Dahling, Detroit, Mich., James W. Beasley, Jr., Cadwalader, Wickersham & Taft, Palm Beach, Fla., Grant B. Hering, Cadwalader, Wickersham & Taft, New York City, for Atlantis Group, Inc.

Robert H. Yaffe, Miami Beach, Fla., William J. Waddell, Grand Rapids, Mich., Stanley R. Wolfe, Jay Robert Stiefel, Janice Siegel, Berger & Montague, P.C., Stuart H. Savett, Jeanne P. Wrobleski, Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa., for Irving M. Bier et al.

William J. Waddell, Grand Rapids, Mich., Paul Steinberg, Steinberg & Slewett, Miami, Fla., Richard Schiffrin, Schiffrin & Craig, Chicago, Ill., Alvin J. Ivers, Philadelphia, Pa., Jill S. Abrams, Emily C. Komlossy, Abbey & Ellis, New York City, for Jerry Atcovitz.

Jay Robert Stiefel, Berger & Montague, P.C., Stuart H. Savett, Jeanne P. Wrobleski, Kohn, Savett, Klein & Graf, Philadelphia, Pa., for Plato Paper Products, Inc. Grant J. Gruel, Gruel, Mills, Nims & Pylman, Grand Rapids, Mich., Mercer K. Clarke, Richard H. Critchlow, Will & Emery, Miami, Fla., William R. Golden, Jr., Kelley, Drye & Warren, New York City, for Rospatch Corp.

L. Roland Roegge, Smith, Haughey, Rice & Roegge, P.C., Grand Rapids, Mich., James N. Nowacki, William R. Jentes, Kirkland & Ellis, Chicago, Ill., Richard H. Critchlow, McDermott, Will & Emery, Michael Nachwalter, William J. Blechman, David H. Lichter, Kenny, Nachwalter, Seymour & Arnold, P.A., Miami, Fla., for Warner, Norcross & Judd and Paul K. Gaston.

Jon G. March, Thomas R. Knecht, Miller, Johnson, Snell & Cummiskey, Grand Rapids, Mich., Mercer K. Clarke, Richard H. Critchlow, McDermott, Will & Emery, Miami, Fla., for J. Grant Beadle, Jones Y. Pharr, Jr., James R. Sebastian, Jr., Keith C. Vander Hyde and Glenn M. Walters.

Gregory L. Curtner, Carl H. von Ende, Peter W. Waldmeir, Miller, Canfield, Paddock & Stone, Detroit, Mich., Jon G. March, Thomas R. Knecht, Miller, Johnson, Snell & Cummiskey, Grand Rapids, Mich., Mercer K. Clarke, Richard H. Critchlow, McDermott, Will & Emery, Miami, Fla., for Thomas H. Butler.

H. Rhett Pinsky, Pinsky, Smith, Fayette & Hulswit, Grand Rapids, Mich., Stuart J. McGregor, Miami, Fla., for Eugene J. Harris.

William F. Hunting, Jr., Law, Weathers & Richardson, Grand Rapids, Mich., Mark Hicks, Miami, Fla., for William E. Malpass, Jr. and Joseph A. Parini.

John W. Allen, Howard & Howard, P.C., Kalamazoo, Mich., Mercer K. Clarke, Richard H. Critchlow, Will & Emery, Miami, Fla., for Paul V. Smith.

Fred W. Freeman, Dickinson, Wright, Moon, Van Dusen & Freeman, Detroit, Mich., Richard A. Glaser, Dickinson, Wright, Moon, Van Dusen & Freeman, Grand Rapids, Mich., for Arthur Andersen & Co.

OPINION

HILLMAN, Senior District Judge.

In these consolidated actions, plaintiffs assert federal securities and state law violations against the various defendants. According to the complaints, defendants took actions which allegedly amounted to a fraud on the stock market and caused plaintiffs to suffer damages. Before the court are motions to dismiss these cases. The motions have been fully briefed and oral argument was heard on February 7, 1991. For the reasons that follow, defendants' motions are granted in part and denied in part.

There are three cases under consideration in these motions to dismiss. In the first case, No. 1:90-cv-805, plaintiff Atlantis Group, Inc. ("Atlantis") is a Delaware corporation with its base of operations in Florida. From October 8, 1987 to November 18, 1988, Atlantis purchased 476,100 shares of Rospatch common stock at an average price of $20.87 per share. Atlantis, ¶ 32. Atlantis currently owns about 20% of Rospatch outstanding stock and since mid-1989 has had two representatives on the Rospatch board of directors.

In the second case, No. 1:90-cv-806, plaintiff Plato Products, Inc. ("Plato") purchased Rospatch common stock in March 1987 and seeks to represent the class of investors who purchased Rospatch common stock during the period from March 1987 through March 1990.

In the third case, No. 1:90-cv-807, plaintiffs Jerry and Rosalyn Atcovitz were Rospatch common stockholders during the period from March 1987 through March 1990, and have filed a shareholder derivative action.

Defendant Rospatch is a Michigan corporation headquartered in Grand Rapids. Rospatch manufactures wood products and prior to divesting its Technical Products Group ("TPG") in 1989, was involved in the defense electronics business. Joseph V. Parini ("Parini") was Rospatch's president, chief executive officer and director. Defendant William E. Malpass ("Malpass") was Rospatch's chief financial officer, vice president-finance, secretary and treasurer. Defendant Paul V. Smith ("Smith") was Rospatch's chief operating officer. Defendant Eugene Harris ("Harris") was Rospatch's controller. Defendant J. Grant Beadle, Thomas W. Butler, Jones Y. Pharr, Jr., James R. Sebastian, Jr., Keith E. Vander Hyde ("Vander Hyde") and Glenn Walters were members of Rospatch's board of directors. Collectively, they are referred to as the "Outside Directors." Defendant Warner, Norcross & Judd ("Warner Norcross") was Rospatch's former legal counsel. Defendant Paul K. Gaston ("Gaston"), managing partner at Warner Norcross, was Rospatch's former attorney and a member of the Rospatch board of directors. Defendant Arthur Andersen & Co. ("Arthur Andersen") was Rospatch's independent auditor.

INTRODUCTION

When considering a motion to dismiss, the factual allegations in the complaint must be taken as true. Craighead v. E.F. Hutton & Co., Inc., 899 F.2d 485, 489 (6th Cir.1990). What follows is a recitation of the allegations, as distilled from Atlantis' complaints.

During the time Atlantis purchased Rospatch stock, Atlantis claims that it expressly relied upon the then currently available public information concerning Rospatch, specifically the Rospatch Securities and Exchange Commission filings from 1987 through 1988 (the "public documents"). Atlantis, ¶ 33. The class plaintiffs claim to have relied upon the integrity of the market, which was in turn based upon the then current publicly available information concerning Rospatch, specifically the public documents. Class Action, ¶¶ 48 and 63.

As of December 31, 1986, Rospatch's financial statements showed a net worth of approximately $41 million. The company's net worth was estimated at $43 million as of December 31, 1987. Atlantis, ¶ 45. As of December 31, 1988, Rospatch stated its net worth was approximately $47 million. In or about March 1989, Rospatch placed the Technical Products Group ("TPG"), its defense-oriented businesses, for sale, and listed the TPG at full book value as a "discontinued operation." On May 22, 1989, Rospatch wrote down the net asset value of the TPG from $28.5 million to $21.25 million, a loss of $7.25 million. Atlantis, ¶ 46. Later that same month, Rospatch attempted to sell itself to Atlantis, which had by then purchased approximately 19% of the outstanding stock. Atlantis, ¶¶ 4 and 72. Atlantis entered into a Letter of Intent to acquire Rospatch on June 20, 1989. Atlantis, ¶ 73. Thereafter, Atlantis conducted a due diligence investigation from June through September, 1989. Atlantis, ¶ 79.

In the course of its due diligence investigation, Atlantis claims that it discovered that an impending deal to sell the TPG to a defense company was a "sweetheart deal" whose major beneficiary was to be CEO Parini. Atlantis ¶¶ 69 and 79. Atlantis advised Rospatch that it could get a higher price by selling to other bidders. Atlantis ¶ 79. Rospatch eventually signed agreements to sell the TPG to several buyers at a combined price above the deal negotiated by Parini and Gaston. Atlantis ¶ 79. The prospective buyers of TPG conducted their own due diligence investigation, Atlantis ¶ 78, and as a result of that investigation and Atlantis' investigation, the complaints allege that Rospatch's financial statements were revealed to be suspect in mid-September 1989.

On November 10, 1989, Rospatch wrote down the assets of the TPG by $3,250,000. By December 1989, Rospatch had written down $16,875,000 for the year for the TPG. Atlantis, ¶ 46. Thus, from March 31, 1989 through December 31, 1989, Rospatch wrote off 59% of the net asset value of the TPG, which amounted to writing off 36% of Rospatch's net worth. Atlantis, ¶ 46. The complaints allege concealment of other financial problems. See Atlantis, ¶ 46 C-L.

At the end of 1989, the Audit Committee began to inquire into responsibility for the company's financial problems. Controller Harris was fired for cause in December 1989. Atlantis, ¶ 80. He was found to have kept two sets of books at GTI, a TPG company, and to have falsified the books and records of GTI to conceal losses. Atlantis, ¶ 46B.

A special counsel to the Audit Committee allegedly concluded in early 1990 that management had "cooked the books" in 1988 and early 1989, in order to grant themselves bonuses and make Rospatch appear to be sound. Atlantis, ¶ 84. The complaints allege that the special counsel found that Parini and Malpass knew and approved of the illegal conduct of Harris, willfully falsified Rospatch's financial statements, and failed to maintain adequate internal accounting controls. Atlantis ¶ 84. The special counsel recommended to the Audit Committee that defendants Parini and...