MacDougle v. Cascade Int'l Inc.

• Decision Date: 11 July 2001
• Docket Number: No. 99-14681,99-14681
• Parties: (11th Cir. 2001) JAMES ZIEMBA, PATRICIA MACDOUGLE, et. al., Plaintiffs-Appellants, v. CASCADE INTERNATIONAL, INC., VICTOR G. INCENDY, et. al., Defendants-Appellees
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1194

256 F.3d 1194 (11th Cir. 2001)

JAMES ZIEMBA, PATRICIA MACDOUGLE, et. al., Plaintiffs-Appellants, v. CASCADE INTERNATIONAL, INC., VICTOR G. INCENDY, et. al., Defendants-Appellees.

No. 99-14681

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

July 11, 2001

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Appeal from the United States District Court for the Southern District of Florida. D. C. Docket No. 91-08652 CV-LCN.

Before ANDERSON, Chief Judge, CARNES, Circuit Judge, and NANGLE^*, District Judge.

ANDERSON, Chief Judge:

I. INTRODUCTION

By way of an amended complaint filed in 1992, Plaintiffs, shareholders of Cascade International, Inc., ("Cascade"), brought this securities class action against Cascade officers and directors, including Victor Incendy, Cascade's President and CEO; Bernard H. Levy, Cascade's independent auditor; Coopers & Lybrand ("C&L"), an accounting firm; Gunster, Yoakley, & Stewart, P.A. ("GY&S"), a law firm; and others, alleging, inter alia, violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.

In an Order dated December 16, 1993, the district court granted several defendants' motions to dismiss, including such motion filed by GY&S. See In re Cascade Int'l Sec. Litig., 840 F. Supp. 1558 (S.D. Fla. 1993). The district court denied C&L's motion to dismiss, except with respect to Plaintiffs' claims of negligent misrepresentation and common law fraud. See id. Plaintiffs filed a motion for entry of final judgment pursuant to Fed. R. Civ. Proc. 54(b) as to GY&S and other defendants. This motion was denied.

In 1994, C&L filed a motion to reconsider the district court's ruling on C&L's motion to dismiss in light of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439 (1994), in which the Supreme Court held that a private plaintiff may not maintain an aiding and abetting suit under § 10(b). In an Order dated June 27, 1995, the district court granted C&L's motion to reconsider and dismissed Plaintiffs' § 10(b) claim against C&L in light of Central Bank. See In re Cascade Int'l Sec. Litig., 894 F. Supp. 437 (S.D. Fla. 1995). The district court also denied Plaintiffs' motion for leave to amend their complaint. See id. Plaintiffs filed a motion for entry of final judgment pursuant to Fed. R. Civ. Proc. 54(b) or 28 U.S.C. § 1292(b), which was denied.

After further proceedings,¹ final judgment was entered by the district court on September 30, 1999. On October 27, 1999, Plaintiffs filed a timely notice of appeal. They appeal only their claims against C&L and GY&S for primary liability under § 10(b) and the district court's denial of their motion to amend their complaint.

The finality of the September 30, 1999 Order renders the prior interlocutory orders appealable without Rule 54(b) certification. See Barfield v. Brierton, 883 F.2d 923, 930 (11th Cir. 1989) (noting that "the appeal from a final judgment draws in question all prior non-final orders and rulings which produced the judgment"). Thus, this Court has jurisdiction over this appeal. See 28 U.S.C. § 1291.

II. BACKGROUND FACTS

Accepting all well-pleaded facts in the complaint as true,² we assume the following facts. Cascade became a public company in 1985. At all relevant times, Cascade's stock was traded on the National Association of Securities Dealers Automated Quotations ("NASDAQ") market under the symbol "KOSM." Cascade's primary business involved the formulation, manufacture, and retail sale of women's apparel, cosmetics, and fragrances. Its activities were operated through numerous subsidiaries, including Jean Cosmetics; Boutiques Allison, Inc.; Fran's Fashions, Inc.; and Conston Corp.

By the close of Cascade's fiscal year ended June 30, 1987, Cascade was already reporting impressive gains through sales of cosmetics and women's apparel. In each of its Form 10-Ks filed in 1989, 1990, and 1991, Cascade reported considerable growth and profits. These 10-Ks contained statements by Cascade's independent auditor, Bernard Levy, in which he attested to the fact that he had conducted his audits of Cascade "in accordance with generally accepted auditing standards."

On August 20, 1991, the SEC wrote to Incendy, Cascade's President and CEO, stating that it was reviewing transactions by Cascade and/or its subsidiaries and requesting numerous documents, including a list of all stores and cosmetic counters operated by Cascade. In September 1991, rumors began to circulate that Cascade's reported profits were questionable. On October 1, 1991, the Overpriced Stock Service ("OSS") issued a report on Cascade, in which it stated that "the odds of trouble ahead" were "high." In mid-October, several class action lawsuits were filed. Cascade reported that there were "no negative developments" in its operations and said the suits were "without merit." It threatened litigation against market analysts who questioned the company's financial condition.

Then, on November 20, 1991, Cascade announced that its financial statements for the fiscal year ended June 30, 1991, "may not be accurate" and that it had been unable to locate Incendy for several days. The National Association of Securities Dealers halted trading in Cascade stock until the company could provide the public with accurate financial statements. On December 13, 1991, the newly appointed interim chair of Cascade, Aaron Karp, announced that the Cascade Board had authorized the filing of a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code. Cascade and its subsidiaries subsequently filed for bankruptcy protection. In a letter issued to Cascade shareholders in January 1992, Karp revealed that Cascade had materially misrepresented its assets, profits, and revenues and had issued millions of unauthorized shares of stock. On July 7, 1992, Plaintiffs filed this amended class action on behalf of purchasers of Cascade common stock between August 11, 1989, and November 19, 1991, inclusive.

III. STANDARD OF REVIEW

The only issues on appeal are whether the district court erred in dismissing Plaintiffs' claims of primary liability under § 10(b) against C&L and GY&S, and whether the district court erred in denying Plaintiffs' motion for leave to amend their complaint. We review the dismissal of a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure de novo. See Harris v. Ivax Corp., 182 F.3d 799, 802 (11th Cir. 1999). We review the district court's refusal to grant leave to amend for abuse of discretion, although "we review de novo the underlying legal conclusion of whether a particular amendment to the complaint would be futile." Id. For the reasons stated below, we affirm.

IV. ALLEGATIONS

In their amended complaint, Plaintiffs allege the following with respect to GY&S and C&L:

A. Allegations with respect to GY&S

1. GY&S represented Cascade on a variety of legal matters from the summer of 1989 through Incendy's disappearance in November 1991 and was retained to assist Cascade and Incendy in defending against those who raised questions about the truthfulness of Cascade's reported financial condition.

2. On January 15, 1991, GY&S sent Incendy a letter regarding an option agreement that Cascade had. GY&S told Incendy that all material information about Cascade's business and operations must be accurately reflected in Cascade's registration statement, and GY&S recommended that Cascade correct any inaccuracies in Cascade's recently filed prospectus. No corrections were made.

3. In the summer and fall of 1991, Cascade and Conston were considering a deal with Oleg Cassini. GY&S advised Cascade how to issue information to the public regarding the proposed deal. In June 1991, Cascade issued two press releases regarding a purported agreement that it and Conston had reached with Oleg Cassini. In the fall of 1991, GY&S was actively involved in trying to help Cascade and Conston "get out" of the purported agreement. GY&S made no effort to cause Cascade to issue any press releases disclaiming the June 1991 press releases.

4. The OSS published an article on October 2, 1991, raising questions about Cascade. On October 7, 1991, GY&S prepared, without "appropriate investigation or inquiry," a memorandum for Incendy suggesting statements that he could issue to the public in response to the OSS Report and Cascade's recent stock price decline. GY&S allegedly did nothing to assure itself of the factual accuracy of its proposed statements. Cascade then issued a document to the public that was based largely on GY&S's recommendations.

5. On October 2, 1991, in response to a request from Incendy, GY&S sent Incendy an opinion letter regarding the bankruptcy status of Conston. Despite its knowledge that Conston's Plan of Reorganization had been confirmed on April 18, 1991, GY&S concluded that "there is no doubt that Conston is in bankruptcy." This letter enabled Incendy to justify the non-consolidation of Conston's financial statements with those of Cascade in 1991.

6. In October 1991, GY&S attorney Michael Platner spoke to stock analysts, who were allegedly spreading rumors about Cascade and advising people to sell Cascade stock short, and urged them to stop raising questions about Cascade.

7. On October 30, 1991, Cascade issued a press release in which it stated that it had instructed its attorneys to file suit against the OSS for trade defamation and various other claims. Cascade also stated that it believed there was a connection between the OSS Report and shortselling activity that was orchestrated by brokerage firm analysts. Although GY&S reviewed and approved the press release, it was drafted by a different law firm. GY&S knew from its legal research that a trade defamation suit would have "substantial difficulties," and it knew that its investigation had revealed no connection between...