Lirette v. Shiva Corp.
| Decision Date | 19 November 1998 |
| Docket Number | No. Civ.A. 97-11159-WGY.,Civ.A. 97-11159-WGY. |
| Citation | 27 F.Supp.2d 268 |
| Parties | Jesse P. LIRETTE, Sr., Robert W. Benzinger, Andre Kraiem, and Victor Kraiem, on behalf of themselves and all others similarly situated, Plaintiffs, v. SHIVA CORPORATION, Frank A. Ingari, Cynthia A. Deysher and David S. Cole, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Steven Schulman, Lori G. Feldman, William C. Fredericks, Kim Elaine Miller, Milberg, Weiss, Bershad, Spechtrie & Lerach, New York City, Arnold Levin, Levin, Fishbein, Sedran & Berman, Philadelphia, PA, Barbara A. Podell, Savett, Frutkin, Podell & Ryan, P.C. Philadelphia, PA, David Bershad, Sanford P. Dumain, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Lawrence Soicher, Law Offices of Lawrence Soicher, New York City, Richard S. Schiffrin, Andrew L. Barroway, Schiffrin & Craig, Ltd, Bala Cynwyd, PA, David Jaroslawicz, Jaroslawicz & Jaros, New York City, Stuart H. Savett, Savett Frutkin Podell & Ryan, PC, Philadelphia, PA, Nancy F. Gans, Moulton & Gans, LLP, Boston, MA, Stephen Moulton, Moulton & Gans, Boston, MA, for plaintiffs.
Jeffrey S. Abraham, Milberg, Weiss, Bershad, Spechtrie & Lerach, New York City, for Consolidated plaintiffs.
William H. Paine, Jeffrey B. Rudman, James J. Nicklaus, Hale & Dorr, Boston, MA, for defendants.
David Pastor, Gilman & Pastor, Boston, MA, for Joseph Dibenidetto, movant.
In 1995, Congress enacted legislation attempting to wrest control over securities fraud class action lawsuits from the plaintiffs' bar devoted to such litigation and confer it upon counsel for larger institutional investors. See Private Securities Litigation Reform Act ("PSLRA"), Publ L. No. 104-67 codified at 15 U.S.C. § 78u-4 (1995).1 Such a measure, it was believed, would cut down on frivolous litigation as counsel for institutional investors were thought to take a more balanced cost-benefit view of such litigation.2
While at it, Congress raised the hurdle a plaintiff would have to jump before being permitted to present her case to a jury.3
This is a consolidated putative class action alleging violations of the Securities Exchange Act of 1934 ("the Exchange Act") by Shiva Corporation ("Shiva" or "the company") and three individual defendants. The plaintiffs (here called "Lirette" for simplicity's sake) allege violations of section 10(b) and Rule 10b-54 promulgated thereunder (Count One) and section 20(a)5 (Count Two) of the Exchange Act. The action is brought on behalf of purchasers of Shiva common stock during the period of September 10, 1996 through and including March 31, 1997 ("the class period"). Lirette complains of a fraudulent scheme and deceptive course of business that injured purchasers of Shiva stock during the class period. The defendants now move to dismiss the Supplement to the Consolidated Amended Class Action Complaint.
Shiva manufactures remote access computer networking products. Remote access products enable users of remote computers (such as personal computers or those located in the branch office of a business) to access an existing central computer network (such as the Internet or a business's local area network) and its stored data and other resources as if those remote users were directly connected to the central computer network. Shiva's leading product line at all times relevant to this action was the LanRover remote access product line, which Shiva introduced in 1992. This product line included the high-capacity LanRover Access Switch, which Shiva introduced in 1996.
The defendant Frank A. Ingari ("Ingari") was, at all relevant times, Chief Executive Officer and President of Shiva and Chairman of Shiva's Board of Directors.
The defendant Cynthia A. Deysher ("Deysher") was, at all relevant times, Chief Financial Officer of Shiva until she resigned from that position and left the company on or about March 31, 1997, the last day of the class period.
The defendant David C. Cole ("Cole") was, at all relevant times, a member of Shiva's Board of Directors and served as a member of the Compensation and Audit Committees. During the class period, Cole sold 50,000 shares of Shiva common stock for approximately $1,900,000.
Lirette alleges that during the class period, the defendants falsely portrayed Shiva as a vibrant company with strong growth in sales, revenues, and earnings in its market. He further alleges that, during the class period, the defendants filed quarterly reports and other financial statements with the SEC that falsely represented that they had been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), and that purported to confirm the defendants' representations about Shiva's sales, revenues, receivables, earnings, and inventories.
According to Lirette, Shiva's officers and directors knew during the class period — but did not disclose — that demand for its products had weakened. Consequently, he maintains, the defendants artificially inflated the company's reported sales, receivables, revenues, and earnings. Lirette further alleges that the defendants engaged in "channel stuffing," a practice whereby Shiva recognized revenue upon the shipment of products to its distributors and resellers, whom Shiva induced to purchase more products than they needed through a generous return policy, price promotions, and strong-arm sales tactics. Courts have found that "channel stuffing" is actionable under the Exchange Act. See In re Lotus Dev. Corp. Sec. Litig., 875 F.Supp. 48, 52-53 (D.Mass.1995) (Saris, J.); Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F.Supp. 1260, 1266 (S.D.Fla.1995); In re Compaq Sec. Litig., 848 F.Supp. 1307, 1320 (S.D.Tex.1993).
In addition, Lirette alleges that, throughout the class period, Shiva affirmatively and materially misrepresented its product return policy. While the company maintained that distributors and resellers could return products within a certain time period for particular reasons, Lirette maintains that Shiva's policy actually allowed purchasers to make returns at any time and for any reason. Lirette alleges that this policy resulted in a distortion of the company's revenues in violation of GAAP.
Lirette further asserts that the defendants' scheme artificially inflated the price of Shiva stock, thereby enabling the defendant Cole to pocket approximately $1,900,000 from the sale of 50,000 shares during the class period.
Lirette contends that when the truth about Shiva's revenues reached the market in the first quarter of 1997, shares of Shiva stock sank more than eighty-six percent from a class period high of $63.50 per share, to a low of $8.75 per share.
Lirette filed suit on May 21, 1997 and subsequently filed a Consolidated Amended Class Action Complaint on November 21, 1997. On March 2, 1998, the defendants moved to dismiss. Finding plaintiff's Consolidated Amended Class Action Complaint unacceptable under the PSLRA, this Court ordered Lirette to file a "Supplement" specifying, as to each particular allegation, whether that allegation was made upon information and belief or was supported by some document or statement on personal knowledge by a potential witness. See Lirette v. Shiva Corp., 999 F.Supp. 164 (D.Mass.1998) (). Lirette complied with that order, and the defendants' motion to dismiss the Supplement to Consolidated Amended Class Action Complaint ("the Complaint") is now before the Court.
In reviewing a motion to dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court must "take the allegations in the complaint as true and grant all reasonable inferences in favor of the plaintiff." Monahan v. Dorchester Counseling Ctr., 961 F.2d 987, 988 (1st Cir.1992). The Court may grant dismissal only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Roeder v. Alpha Indus., 814 F.2d 22, 25 (1st Cir.1987) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99 [1957]).
In a securities action, two additional considerations bear upon the motion to dismiss: Federal Rule of Civil Procedure 9(b) and the PSLRA. Both Rule 9(b) and the PSLRA concern the legal sufficiency of the complaint; they do not affect the substantive elements of a claim that Lirette ultimately must prove.
Rule 9(b) imposes a heightened pleading requirement on plaintiffs alleging fraud: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R.Civ.P. 9(b). The special pleading requirement in the fraud context has three primary purposes: "to place the defendant on notice; to safeguard defendants from unwarranted damage to their reputations; and to protect defendants from the danger of strike suits." In re Lotus Dev. Sec. Litig., 875 F.Supp. at 51 (citing New England Data Servs. v. Becher, 829 F.2d 286, 289 [(1st Cir.1987)]). A "strike suit" refers to a largely groundless claim brought by a plaintiff who thereafter engages in extensive discovery to increase settlement value rather than to discover relevant evidence of fraud. See id.
Like Rule 9(b), the PSLRA seeks to "do away with the kind of lawsuit that happens because a companies' [sic] stock drops, a suit is filed, they press discovery and they move and collect a large settlement from the company, when the suit may be baseless." 104 Cong.Rec. S19,063 (daily ed. Dec. 21, 1995) (statement of Sen. Feinstein). Among other changes to the securities laws, the PSLRA makes the pleading standard in securities fraud cases even more rigorous than Rule 9(b) traditionally has required.6 Under the...
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