Kennilworth Partners L.P. v. Cendant Corp.
| Decision Date | 10 August 1999 |
| Docket Number | No. CIV. A. 99-759.,CIV. A. 99-759. |
| Parties | KENNILWORTH PARTNERS L.P., Soundshore Partners L.P., and Soundshore Holdings Ltd., Plaintiffs, v. CENDANT CORPORATION, HFS, Inc., Ernst & Young, LLP., Walter A. Forbes, Henry R. Silverman, Michael P. Monaco, Scott E. Forbes, Stephen P. Holmes, Robert D. Kunish, Christopher K. Mcleod, E. Kirk Shelton, Robert T. Tucker, James E. Buckman, John D. Snodgrass, Bartlett Burnap, Leonard S. Coleman, T. Barnes Donnelley, Martin L. Edelman, Frederick D. Green, Stephen A. Greyser, Dr. Carole G. Hankin, Brian Mulroney, Robert E. Nederlander, Burton C. Perfit, Anthony G. Petrello, Robert W. Pittman, E. John Rosenwald, Jr., Robert J. Rittereiser, Stanley M. Rumbough, Jr., Leonard Schutzman, Robert F. Smith, Roger J. Stone, Jr., and Craig R. Stapleton, Defendants. |
| Court | U.S. District Court — District of New Jersey |
Joel M. Leifer, Joel M. Leifer & Associates, New York City, NY, for Plaintiffs Kennilworth Partners, et al.
Steven S. Radin, Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross, Newark, NJ, Greg A. Danilow, Timothy E. Hoeffner, Laura Proctor, Weil, Gotshal & Manges LLP, New York City, NY, Dennis J. Block, Howard Hawkins, Cadwalader, Wickersham & Taft, New York City, NY, for Defendant CUC Directors.
Michael Rosenbaum, Carl Greenberg, Budd, Larner, Gross, Rosenbaum, Greenberg & Sade P.C., Short Hills, NJ, Samuel Kadet, Skadden, Arps, Slate, Meagher & Flom, New York City, NY, for defendant Cendant Corporation.
Herbert J. Stern, Stephen M. Greenberg, Joel M. Silverstein, Stern & Greenberg, Roseland, NJ, James G. Kreissman, Jacob S. Pultman, Lauren J. Rosenblum, Simpson, Thatcher & Bartlett, New York City, NY, for Defendant HFS Directors.
Douglas S. Eakeley, Theodore V. Wells, Jr., Peter L. Skolnik, Lowenstein Sandler P.C., Roseland, NJ, Alan N. Salpeter, Caryn L. Jacobs, Bennet W. Lasko, Mayer, Brown & Platt, Chicago, IL, Kathryn A. Oberly, Robert G. Cohen, William P. Hammer, Jr., Ernst & Young L.L.P., New York City, for Defendant Ernst & Young.
Kennilworth Partners, L.P., Soundshore Partners, L.P. and Soundshore Holdings LTD. (collectively "the plaintiffs"), have sued the following defendants, claiming violations of numerous securities laws. Defendant Cendant Corporation ("Cendant") has moved to dismiss Counts I and II of the plaintiffs' amended complaint. The defendant CUC Directors have moved to dismiss Counts I, III, IV and V. Defendant Ernst & Young L.L.P. has moved to dismiss Counts I and III. The defendant HFS Directors have moved to dismiss Counts I, III, IV and V. Their motions are granted.
Plaintiffs Kennilworth Partners L.P. ("Kennilworth"), Soundshore Partners L.P. ("Soundshore Partners") and Soundshore Holdings LTD. ("Soundshore Holdings") are companies in the business of investment in securities and other financial instruments. Defendant Cendant is a diversified corporation formed from the merger of defendants CUC Corporation ("CUC") and HFS, Inc. ("HFS"). Defendant Ernst & Young ("E & Y") is a public accounting firm which, as the independent auditor for CUC, performed audits of CUC's 1995, 1996 and 1997 financial statements.
In February 1996, HFS registered and issued $210 million in 4 ¾% Convertible Senior Notes due 2003 (the "HFS notes") by filing a Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC"). The holders of these notes received the right to convert them into shares of HFS common stock at a predetermined price. Plaintiffs Kennilworth, Soundshore Partners and Soundshore Holdings purchased a number of the HFS Notes. On December 17, 1997, defendant CUC merged with defendant HFS. The resulting entity was named Cendant Corporation.
Following the merger, holders of HFS notes had the option to convert them into Cendant common stock at $27.76 per share (the "conversion price"). Cendant had the right to redeem the HFS notes for cash at 103.393% of their face value. This right was triggered only if Cendant's common stock price had exceeded $38.86 per share for twenty days within a period of thirty consecutive trading days before the notice of redemption. In such case, the holders of HFS notes had the option of accepting the cash payment or converting the HFS notes into Cendant stock. On April 3, 1998, with its stock trading at approximately $40 per share, Cendant announced its intention to redeem the HFS notes. On April 6, 1998, Kennilworth converted $6 million principal amount of HFS notes into 216,000 shares of Cendant common stock at the conversion rate of $27.761 Kennilworth also redeemed for cash approximately $2.9 million of HFS notes purchased on the open market. On April 13, 1996 Soundshore Partners and Soundshore Holdings converted $3 million principal amount of HFS notes into 108,000 shares of Cendant stock at the conversion price of $27.76.2
In February, 1997, CUC issued 3% convertible notes due 2002 (the "CUC Notes"). Between March 18, 1998 and March 20, 1998, Kennilworth purchased CUC Notes in the open market for approximately $25 million.
On April 15, 1998, Cendant announced that it had discovered accounting irregularities in the membership clubs operations unit which had been part of the CUC business. Cendant also announced that it would restate annual and quarterly net income and earnings per share for 1997 and might restate certain other periods. On the following day, Cendant's stock price fell 46 percent. Kennilworth then sold the CUC notes at a loss of approximately $9.7 million. Eventually, Cendant restated earnings for the calendar years ended December 31, 1995, 1996 and 1997 (as well as all quarters in 1996 and 1997) and the first two quarters of 1998. On September 29, 1998, Cendant publicly announced that it had lost $217.2 million in 1997 instead of earning $55.5 million as it had reported earlier.
On January 25, 1999, the plaintiffs filed an amended complaint in the United States District Court for the Southern District of New York. That complaint, which was transferred to this Court on February 4, 1999, alleges violations by Cendant, HFS, certain HFS Directors, certain CUC Directors and E & Y of Section 11, 15 U.S.C. § 77k, of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (the "Securities Act") (Count I), violations by Cendant and HFS of Section 12, 15 U.S.C. § 77l, of the Securities Act (Count II), violations by all defendants of Section 10(b), 15 U.S.C. § 78j(b), of the Securities and Exchange Act of 1934, 15 U.S.C. § 78, et seq. (the "Exchange Act") and Rule 10b-5, 17 C.F.R. § 240.10b-5 (Count III), violations by the HFS and CUC Directors (collectively "the individual defendants") of Section 15, 15 U.S.C. § 77o, of the Securities Act (Count IV), violations by the individual defendants of Section 20(a), 15 U.S.C. § 78t(a), of the Exchange Act, and breach of contract against HFS and Cendant (Count VI). Defendants Cendant, E & Y HFS Directors and CUC Directors have filed motions to dismiss the plaintiffs' complaint.
On a Rule 12(b)(6) motion, the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the non-moving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir.1994). The question is whether the plaintiff can prove any set of facts consistent with his allegations that will entitle him to relief, not whether he will ultimately prevail. See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).
While a court will accept well-pleaded allegations as true for the purposes of the motion, it will not accept legal or unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegations. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977); Washington Legal Found. v. Massachusetts Bar Found., 993 F.2d 962, 971 (1st Cir.1993). Moreover, the claimant must set forth sufficient information to outline the elements of his claims or to permit inferences to be drawn that these elements exist. See Fed. R.Civ.P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
The plaintiffs allege that the defendants violated Section 11 of the Securities Act. Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, provides for damages caused by a false or misleading registration statement. If the registration statement "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading," any person who acquired that security may sue every person who signed the registration statement, every director or partner, every professional named as having prepared or certified the registration statement or any valuation used in connection with it, and every underwriter. Id.
Under 15 U.S.C. § 77k(e), damages are calculated as the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and:
(1) the value thereof as of the time such suit was brought, or
(2) the price at which such security shall have been disposed of in the market before suit, or
(3) the price at which such security shall have been disposed after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security and the value thereof as of the time such suit was brought.
However, if the defendant proves that all or any portion of such damages represents something other than the depreciation in value of the security resulting from the false or...
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