Matrix Capital Management Fund, Lp v. Bearingpoint

• Decision Date: 31 July 2009
• Docket Number: No. 08-1035.,08-1035.
• Citation: 576 F.3d 172
• Parties: MATRIX CAPITAL MANAGEMENT FUND, LP; Matrix Capital Management Fund II, LP; Matrix Capital Management Fund (Offshore), Limited, Plaintiffs-Appellants, and Karen Gautreau, Individually and on behalf of all others similarly situated; Louisiana School Employee Retirement System; Richard Beasley; TDH Partners, LLP; Daniel Sutton; BDM, LLC, Individually and on behalf of all others similarly situated; Detectives Endowment Association Annuity Fund, On behalf of itself and on behalf of all others similarly situated, Plaintiffs, v. BEARINGPOINT, INCORPORATED; Robert S. Falcone; Randolph C. Blazer, Defendants-Appellees, and Roderick C. McGeary; Pricewaterhouse Coopers, LLP, Defendants, and General Retirement System of The City of Detroit; Pension Trust Fund for Operating Engineers; Massachusetts Pension Fund Group; Public Employees' Retirement System of Mississippi; Secure Trading Group, Incorporated; Matrix Capital Management, LP, Movants.
• Court: U.S. Court of Appeals — Fourth Circuit

576 F.3d 172

MATRIX CAPITAL MANAGEMENT FUND, LP; Matrix Capital Management Fund II, LP; Matrix Capital Management Fund (Offshore), Limited, Plaintiffs-Appellants, and Karen Gautreau, Individually and on behalf of all others similarly situated; Louisiana School Employee Retirement System; Richard Beasley; TDH Partners, LLP; Daniel Sutton; BDM, LLC, Individually and on behalf of all others similarly situated; Detectives Endowment Association Annuity Fund, On behalf of itself and on behalf of all others similarly situated, Plaintiffs, v. BEARINGPOINT, INCORPORATED; Robert S. Falcone; Randolph C. Blazer, Defendants-Appellees, and Roderick C. McGeary; Pricewaterhouse Coopers, LLP, Defendants, and General Retirement System of The City of Detroit; Pension Trust Fund for Operating Engineers; Massachusetts Pension Fund Group; Public Employees' Retirement System of Mississippi; Secure Trading Group, Incorporated; Matrix Capital Management, LP, Movants.

No. 08-1035.

United States Court of Appeals, Fourth Circuit.

Argued: January 29, 2009.

Decided: July 31, 2009.

ARGUED:

Solomon B. Cera, Gold, Bennett, Cera & Sidener, L.L.P., San Francisco, California, for Appellants. Richard Louis Brusca, Skadden, Arps, Slate, Meagher & Flom, L.L.P., Washington, DC; Robert A. Van Kirk, Williams & Connolly, LLP., Washington, D.C., for Appellees.

ON BRIEF:

Pamela A. Markert, Kenneth A. Frost, Gold, Bennett, Cera & Sidener, L.L.P., San Francisco, California; Steven J. Toll, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Washington, D.C., for Appellants. Jennifer L. Spaziano, Skadden, Arps, Slate, Meagher & Flom, L.L.P., Washington, DC, Charles Wm. McIntyre, McGuirewoods, L.L.P., Washington, D.C., for Appellees BearingPoint, Inc., and Robert S. Falcone; Steven M. Pyser, Williams & Connolly, L.L.P., Washington, D.C., for Appellee Randolph C. Blazer.

Before MICHAEL, KING, and AGEE, Circuit Judges.

Order reversed, judgment vacated, and case remanded by published opinion. Judge MICHAEL wrote the opinion, in which Judge AGEE joined. Judge KING wrote a separate opinion concurring in the judgment.

OPINION

MICHAEL, Circuit Judge:

Matrix Capital Management Fund, LP, Matrix Capital Management Fund II, LP, and Matrix Capital Management Fund (Offshore), Ltd. (collectively, plaintiffs) represent the class of persons or entities who bought or otherwise acquired the securities of BearingPoint, Inc. between August 14, 2003, and April 20, 2005, and who were damaged as a result. Plaintiffs brought this action against BearingPoint, Randolph Blazer (BearingPoint's former President, Chief Executive Officer, and Chairman of the Board), and Robert Falcone (BearingPoint's former Executive Vice President and Chief Financial Officer) (collectively, defendants). Plaintiffs allege violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5.

This appeal centers on the adequacy of plaintiffs' allegations under the Private Securities Litigation Reform Act of 1995 (PSLRA) § 101(b), 15 U.S.C. § 78u-4. The district court concluded that plaintiffs failed to adequately plead scienter under the PSLRA's heightened pleading standard and dismissed the complaint with prejudice. The court later denied plaintiffs' Rule 59(e) motion to alter or amend the judgment in which plaintiffs argued that, even if dismissal was appropriate, the court should have dismissed without prejudice and granted plaintiffs leave to amend the complaint. Plaintiffs appeal these determinations.

On March 6, 2009, after this appeal was argued, we received notice that BearingPoint had filed a voluntary petition seeking relief under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., in the Southern District of New York. Thereafter, on March 10, 2009, by reason of the automatic stay provision of § 362(a) of the Bankruptcy Code, we entered an order staying proceedings in this appeal. The bankruptcy court modified the automatic stay on May 7, 2009, to permit us to render our decision. We therefore lift our stay and issue this decision.

We agree with the district court's conclusion that plaintiffs failed to adequately plead scienter under the PSLRA, but we reverse the district court's order denying plaintiffs' Rule 59(e) motion to alter or amend the judgment to permit amendment of the complaint. Accordingly, we vacate the judgment. On remand plaintiffs will have the opportunity to file an amended complaint against the non-debtor defendants. In addition, plaintiffs may take action, consistent with bankruptcy law and procedure, with respect to their claims against BearingPoint, a chapter 11 debtor.

I.

In reviewing the district court's dismissal under Rule 12(b)(6), we "accept all factual allegations in the complaint as true," and we "consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

Formerly known as KPMG Consulting, LLC, BearingPoint is a publicly traded management and technology consulting company. It completed an initial public offering in February 2001 and thereafter grew rapidly, acquiring more than thirty consulting businesses around the world in 2002. BearingPoint struggled to integrate its acquisitions; many were foreign concerns that had operated as private partnerships with no obligation to adhere to accounting standards applied to publicly held companies. BearingPoint also lacked the information technology infrastructure to manage its expanded business and keep track of client accounts. In short, BearingPoint lacked internal controls that were adequate to maintain reliable financial reporting and ensure compliance with applicable laws and regulations. BearingPoint has since acknowledged its failings in this regard.

In 2004 BearingPoint introduced a new financial accounting system known as "OneGlobe."¹ OneGlobe proved unreliable and aggravated BearingPoint's problems with its internal controls. BearingPoint personnel did not receive the training necessary to operate the system. The lack of training led employees to select the wrong billing categories, which in turn led to inaccurate hourly billing rates. Employees manually bypassed the OneGlobe system on a routine basis, presumably correcting some errors but also creating the risk of human error and dishonesty.

Certain of BearingPoint's foreign acquisitions created special challenges that further strained its internal controls. In 2004 regional management of BearingPoint China and Japan directed employees to inflate their utilization rates (the percentage of consultant time actually charged to customers) and other financial data. Additionally, BearingPoint Australia recorded revenue in 2004 for contracts that were not completed until 2005. Finally, the values of certain of Bearing-Point's foreign acquisitions decreased during the class period (August 14, 2003, to April 20, 2005), causing the impairment of goodwill.

BearingPoint filed annual and quarterly financial reports with the SEC on SEC Forms 10-K and 10-Q and otherwise made public its financial information during the class period. At the end of each fiscal quarter BearingPoint typically issued a press release and filed an SEC Form 8-K with anticipated financial information. It would subsequently issue a Form 10-K or 10-Q with complete financial information.² Along with each Form 10-K and 10-Q, the individual defendants signed Sarbanes-Oxley certifications indicating that the reports did "not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made." See, e.g., J.A. 372. Plaintiffs allege that the foregoing financial statements were materially false and misleading because, among other things, they misstated BearingPoint's revenues, net income, earnings per share, and goodwill.

In late 2003 BearingPoint reported problems, "primarily [in] the Germanic region," with respect to its internal controls over financial reporting. Annual Report (Form 10-K), at 85 (Sept. 29, 2003). In addition, the company's Form 10-K for the fiscal year ending June 30, 2003, disclosed that an independent accountant reported material weaknesses in certain aspects of its internal controls.³ It reiterated those warnings in statements filed for periods ending September 30, 2003 (filed November 14, 2003), and December 31, 2003 (filed April 16, 2004). BearingPoint nevertheless expressed its confidence in the capability of its internal controls to provide for reliable financial reporting and in the accuracy of all financial statements previously reported. And the Form 10-K filed for the period ending December 31, 2003 (filed April 16, 2004), indicated that Bearing-Point had "resolved the material weaknesses reported in its last Annual Report on Form 10-K. . . . [T]hese are no longer material weaknesses, but are considered to be reportable conditions." Annual Report (Form 10-K), at 100 (Apr. 16, 2004).

On November 8, 2004, BearingPoint filed financial information for the quarter ending September 30, 2004. But shortly thereafter BearingPoint management discovered that the Form 10-Q overstated its accounts receivable by $92.9 million. BearingPoint corrected that error by filing a Form 10-Q/A on November 18, 2004, that otherwise affirmed the financial information reported in the original Form 10-Q. The Form 10-Q/A acknowledged, however, that internal controls had failed to timely identify the accounts receivable error and recognized that this failure amounted to a material weakness. BearingPoint further acknowledged that the company's internal controls as of September 30, 2004, "were not effective to ensure that information required to be disclosed" to the SEC "is recorded, processed, summarized and reported within the...