In re Securities Litigation Bmc Software, Inc.

• Decision Date: 01 October 2001
• Docket Number: No. H-00-0359.,H-00-0359.
• Citation: 183 F.Supp.2d 860
• Parties: In re SECURITIES LITIGATION BMC SOFTWARE, INC.
• Court: U.S. District Court — Southern District of Texas

183 F.Supp.2d 860

In re SECURITIES LITIGATION BMC SOFTWARE, INC.

No. H-00-0359.

United States District Court, S.D. Texas, Houston Division.

October 1, 2001.

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David E. Sharp, Roger B. Greenberg, Greenberg Peden et al., Thomas E. Bilek, Hoeffner Bilek & Eidman, John G. Emerson, Jr., The Emerson Firm, Houston, TX Karen L. Thomas, Jan M. Adler, Tricia L. McCormick, Milberg Weiss et al., San Diego, CA, Michael Braun, Stull Stull et al., Los Angeles, CA, for Dov Klein, BMC Software Plaintiff Group, Stuart Weisenfeld, Edmond Malouf, Mildred Fielden, Dowling Enterprises of Waycross Inc., Narciso Aggio, Todd Sherwin, Dean Francola, James P. Smith, Larry Frangiosa, Richard Platzer and Josephine Platzer.

Charles W. Schwartz, Vinson & Elkins, Houston, TX, Terry T. Johnson, Wilson Sonsini et al., Palo Alto, CA, for BMC Software Inc., Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M. Klausmeyer, Max P. Watson, Jr., William M. Austin, Wayne S. Morris, M. Brinkley Morse, Robert E. Beauchamp, Theodore W. Van Duyn, Garland B. Cupp, Lew Gray and Brinkley Morse.

MEMORANDUM AND ORDER

HARMON, District Judge.

Pending before the Court in the above referenced, consolidated, putative class action brought on behalf of purchasers of BMC Software, Inc. stock between July 29, 1999 and July 5, 2000 ("the Class Period")¹ and alleging fraud in violation of the Securities Exchange Act of 1934 ("Exchange Act"), are two motions: (1) Defendants BMC Software, Inc. ("BMC"), Max P. Watson, Jr. ("Watson"),² William M. Austin ("Austin"),³ Richard P. Gardner ("Gardner"),⁴ Robert E. Beauchamp ("Beauchamp"),⁵ M. Brinkley Morse ("Morse"),⁶ Kevin M. Weiss ("Weiss"),⁷ Roy J. Wilson ("Wilson"),⁸ Wayne S. Morris ("Morris"),⁹ Theodore W. Van Duyn ("Van Duyn"),¹⁰ Kevin M. Klausmeyer ("Klausmeyer"),¹¹ and Stephen B. Solcher's ("Solcher's")¹² motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6)¹³ and 9¹⁴ and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. §§ 78u-4 et seq.,¹⁵ (instrument # 72); and (2) Lead Plaintiffs Associated Trust Company, Piedra Capital, Ltd., James Farris, Thomas Griffith for the Society of the Divine Word, and Kosair Charities' motion to strike exhibits pursuant to Federal Rule of Civil Procedure 12(f)(#77).¹⁶

BMC is a public company headquartered in Houston, Texas selling high performance software tools and utilities for large companies' information technology systems, including mainframe, distributed, and internet-based systems. Its stock trades on the NASDAQ National Market System.

Allegations of Plaintiffs' Consolidated Amended Complaint (# 50)

Plaintiffs sue under §§ 10(b) and 20(a)¹⁷ of the Securities Act of 1934 and Rule 10b-5.¹⁸ They charge that Defendants made

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the following false and misleading statements: (1) that BMC's existing software products were enjoying strong sales; (2) that following the acquisitions of Boole & Babbage and New Dimension Software earlier in 1999, integration was successful; (3) that there was strong demand for BMC's mainframe MIPS¹⁹ software in spite of a slowdown in sales of IBM mainframe computers; and (4) that there was no significant lack of customer deferrals of orders or purchases due to Y2K concerns. These false and misleading statements allegedly artificially inflated the price of its stock to a Class Period high of $86-5/8 on January 3, 2000 and resulted in a 25%-30% growth for BMC during F00-F01²⁰ and the 3rd and 4th quarter F00 EPS of $.52 — $.55 and $.58 — $.64, respectively.

Furthermore, the Consolidated Amended Complaint alleges that during the Class Period, BMC insiders and controlling shareholders sold 1,364,215 shares of their BMC stock at as high as $78.83 to recoup $75.4 million in illegal insider trading proceeds. On January 5, 2000, two days after BMC's stock reached its highest price ever, BMC revealed that because of problems integrating BMC, Boole & Babbage and New Dimension sales forces, sales execution procedures in Europe and the United States, and weakness in demand for mainframe MIPS software products, its third quarter F00 results would be far worse than earlier predictions. That day BMC's stock plummeted from $85-1/8 to $47, an almost 50% drop. When BMC reported a third quarter F00 EPS of just $.41 — a decline from its second quarter F00 and its year-earlier third quarter F99 EPS — BMC stock continued to fall to $35.

Even after the disclosure on January 5, 2000, the amended complaint asserts, Defendants continued to issue false positive statements that BMC's troubles were behind it, to reassure analysts that BMC's mainframe business was "very strong" and "very profitable," and that its future was rosy. On January 25, 2000, Watson stated, "During the third quarter, the company faced an unusual set of challenges — some of which we believe were unique to this quarter and therefore behind us." BMC then surprised the market with a positive earnings report of $.49 per share for the quarter ending March 30, 2000, two cents above the street forecast. As a result, the stock went up to $46 per share and Defendants then sold off their own shares to add to their illegal insider trading proceeds.

According to the complaint, on July 5, 2000, the market was stunned when BMC announced that it would substantially miss earnings estimates. Its stock then plunged from $35 per share to $22, a loss of 40% that set a new 52-week low. Defendants blamed the loss on a shortfall in mainframe license revenues, in sharp contrast to their earlier optimism about that same area of BMC's business. When BMC announced its first quarter F01 results on July 25, 2000, it conceded that its mainframe products would decline 10-20% further. The value of the stock then dropped below $20 per share, becoming the second worst performing stock for the year in the Standard & Poor's 500 Index.

Plaintiffs allege that each Defendant is liable for false statements and for failing to disclose adverse facts while selling BMC stock and for participating in a fraudulent scheme to deceive purchasers of BMC stock. To satisfy the PSLRA's requirement that Plaintiffs plead scienter, Lead Plaintiffs allege that the individual Defendants, by virtue of their executive positions in BMC and involvement in the day-to-day management of the business, actually knew from internal corporate documents and conversations with other corporate officers and employees, as well as attending management and Board meetings, the non-public, negative information about the condition of BMC's business. Specifically the amended complaint asserts that Defendants were aware of the limited demand for sales of its mainframe MIPS software products; of BMC's serious difficulties with integration of Boole & Babbage and New Dimension acquisitions, with BMC's sales force in Europe and the United States, and with customer deferrals and refusal to purchase because of Y2K concerns; and of BMC's deteriorating revenue and EPS prospects. Sales personnel purportedly informed individual Defendants about purchase and sales problems. Moreover Defendants allegedly knew there was no plan to integrate the various sales forces of the merging entities in Europe and the United States. Defendants also allegedly knew that the sales staff's turnovers were high and that the sales personnel were inexperienced, creating additional problems in generating valid sales. They also knew from regular communications with IBM that IBM was experiencing a slowdown in its mainframe/MIPS sales that would result in a slowdown in BMC's sales. Thus each Defendant actually knew or recklessly disregarded that the public statements they made were false or misleading when they were made.

The Consolidated Amended Complaint also conclusorily asserts that all the Defendants had motive and opportunity to perpetrate the fraudulent scheme, as evidenced by their personally profiting from sales of their BMC stock after their false statements caused artificial inflation of the stock price. In mid to late July 1999, BMC stock fell from $64-7/8 to as low as $47-1/2 because investors feared that BMC's revenue and EPS growth would fail to meet forecast levels because of Y2K concerns, the slowing demand for BMC products, and difficulties integrating the Boole & Babbage and New Dimension acquisitions.

On July 29, 1999 BMC announced its first quarter F00 results, EPS of $42, much better than expected. Chairman, President and CEO Watson stated in BMC's release of the results,

Our first quarter for fiscal 2000 was the one in which BMC Software completed its transition into a top-tier systems software provider. Following the merger with Boole & Babbage in March 1999, we successfully completed the acquisition of New Dimension Software. We have spent the quarter bringing the three companies together into what we believe is a powerful, integrated company.

On the same day, after the above, during a conference call for analysts, money and portfolio managers, institutional investors and large BMC shareholders to discuss the first quarter F00 results, its business and its prospects, Watson and Austin represented the following:

1. BMC was successfully integrating New Dimension and Boole and Babbage into its operations and business was performing better than expected.

2. European sales were below plan due to slowness in integrating the Boole and Babbage merger, but operations there were now well integrated and would not interfere with BMC's achieving forecasted F00 results.

3. An increase in BMC's days sales outstanding ("DSO") to 86 was due to the acquisition of Boole & Babbage and New Dimension, which had higher DSOs than BMC; BMC's DSOs would retreat to its traditional 60s during the balance of F00.

4. BMC was experiencing continued strong demand for its mainframe MIPS software.

5. BMC expected that its operating margins would reach 34-36%...