Pacheco v. Cambridge Technology Partners (Mass.), CIV. A. 98-12374-WGY.

• Citation: 85 F.Supp.2d 69
• Decision Date: 01 March 2000
• Docket Number: No. CIV. A. 98-12374-WGY.,CIV. A. 98-12374-WGY.
• Court: United States State Supreme Judicial Court of Massachusetts
• Parties: Leonard J. PACHECO, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, Jim Beebe, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco, Tari Eastman, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, Miguelangel Aponte-Rios, individually and as Co-trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Michael Pacheco Trust, Linda Pacheco, individually, and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Michael Pacheco Trust, James A. Pacheco, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Michael Pacheco Trust, John M. Pacheco, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Andrew Pacheco Trust, as Trustee of the Gina Lynn Young Trust, as Trustee of the Heather Pacheco Trust, as Trustee of the Thomas Pacheco Trust, Michael Resler, as Trustee of the Timothy Pacheco Trust, as Co-Trustee of the Danny Pacheco Trust, as Trustee of the Joseph B. Pacheco Trust, as Trustee of the Sarah Pacheco Trust, Joseph B. Pacheco, as Trustee of the Timothy Pacheco Trust, as Co-Trustee of the Danny Pacheco Trust, as Trustee of the Joseph B. Pacheco Trust, as Trustee of the Sarah Pacheco Trust, Roberta L. Pacheco, as Co-Trustee of the Danny Pacheco Trust, Laura Pacheco, individually and as Co-Trustee of the Margaret Donovan Trust, as Co-Trustee of the Buruka Trust, as Co-Trustee of the Bravo Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustee of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Jennifer A. Pacheco, individually and as Co-Trustee of the Buruka Trust, as Co-Trustee of the Bravo Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustee of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Michelle D. Pacheco, as Co-Trustee of the Buruka Trust, as Co-Trustee of the Bravo Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustee of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Susan C. Lybeck, as Co-Trustees of the Buruka Trust, as Co-Trustee of the Brava Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustees of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Patrice Pacheco, as Co-Trustee of the Margaret Donovan Trust, Matt Donovan, as Co-Trustee of the Margaret Donovan Trust, Mary Paterson, as Trustee of the Alex Paterson Trust and as Trustee of the Tori Patterson Trust, Maureen Parsons, as Trustee of the Michael Beebe Trust and as Trustee of the Patrick J. Beebe Irrevocable Trust, Plaintiffs v. CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. Defendant.

Page 69

85 F.Supp.2d 69

Leonard J. PACHECO, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, Jim Beebe, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco, Tari Eastman, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, Miguelangel Aponte-Rios, individually and as Co-trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Michael Pacheco Trust, Linda Pacheco, individually, and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Michael Pacheco Trust, James A. Pacheco, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Michael Pacheco Trust, John M. Pacheco, individually and as Co-Trustee of the Mary T. Pacheco Trust, as Co-Trustee of the FE & Mary T. Pacheco Trust, as Trustee of the Andrew Pacheco Trust, as Trustee of the Gina Lynn Young Trust, as Trustee of the Heather Pacheco Trust, as Trustee of the Thomas Pacheco Trust, Michael Resler, as Trustee of the Timothy Pacheco Trust, as Co-Trustee of the Danny Pacheco Trust, as Trustee of the Joseph B. Pacheco Trust, as Trustee of the Sarah Pacheco Trust, Joseph B. Pacheco, as Trustee of the Timothy Pacheco Trust, as Co-Trustee of the Danny Pacheco Trust, as Trustee of the Joseph B. Pacheco Trust, as Trustee of the Sarah Pacheco Trust, Roberta L. Pacheco, as Co-Trustee of the Danny Pacheco Trust, Laura Pacheco, individually and as Co-Trustee of the Margaret Donovan Trust, as Co-Trustee of the Buruka Trust, as Co-Trustee of the Bravo Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustee of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Jennifer A. Pacheco, individually and as Co-Trustee of the Buruka Trust, as Co-Trustee of the Bravo Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustee of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Michelle D. Pacheco, as Co-Trustee of the Buruka Trust, as Co-Trustee of the Bravo Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustee of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Susan C. Lybeck, as Co-Trustees of the Buruka Trust, as Co-Trustee of the Brava Trust, as Co-Trustee of the Crocodile Rock Trust, as Co-Trustees of the Inca Trust, as Co-Trustee of the Morigan Trust, and as Co-Trustee of the Sierra Trust, Patrice Pacheco, as Co-Trustee of the Margaret Donovan Trust, Matt Donovan, as Co-Trustee of the Margaret Donovan Trust, Mary Paterson, as Trustee of the Alex Paterson Trust and as Trustee of the Tori Patterson Trust, Maureen Parsons, as Trustee of the Michael Beebe Trust and as Trustee of the Patrick J. Beebe Irrevocable Trust, Plaintiffs v. CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. Defendant.

No. CIV. A. 98-12374-WGY.

United States District Court, D. Massachusetts.

March 1, 2000.

Jeffrey B. Rudman, Gabrielle R. Wolohojian, Lisa Pirozzolo, Hale & Dorr, Boston, MA, Peter S. McCormick, David C. Lundsgaard, K. Michael Fandel, Edward S. Pettigrew, Graham & Dunn, P.C., Seattle, WA, for Leonard J. Pacheco, Diane Pacheco, Jim Beebe, Tari Eastman, Miguelangel Aponte-Rios, Linda Pacheco, James A. Pacheco, John M. Pacheco, Michael Resler, Joseph B. Pacheco, Roberta L. Pacheco, Laura Pacheco, Jennifer A. Pacheco, Michelle D. Pacheco, Susan C. Lybeck, Patrice Pacheco, Matt Donovan, Mary Paterson, Maureen Parsons.

Jordan D. Hershman, Christopher F. Robertson, Lauren A. Stagnone, Justin M. Perrotta, Testa, Hurwitz & Thibeault, LLP, Boston, MA, for Cambridge Technology Partners (Massachusetts), Inc.

MEMORANDUM AND ORDER

YOUNG, Chief Judge.

I. Introduction

This case arises out of a stock for stock merger (the "Merger") between Cambridge Technology Partners (Massachusetts), Inc. ("Cambridge") and Excell Data Corporation ("Excell"), which closed on August 31, 1998 (the "Closing Date"). After a post-closing drop in the price of Cambridge stock, certain former Excell shareholders, including the plaintiff Leonard J. Pacheco (collectively, "Pacheco") sued, asserting claims against Cambridge for violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and for breach of contract, common law fraud, and negligent misrepresentation. On January 28, 1999, this Court granted Cambridge's motion to dismiss the Exchange Act claim but denied the motion with respect to the common law claims. At the time, the Court indicated that Pacheco's remaining claims were "quite vulnerable to a well-pleaded motion for summary judgment." Cambridge here attempts to exploit that vulnerability, while Pacheco moves for leave to file an amended complaint in an effort to revive the once-dismissed Exchange Act claim.

II. Factual Background

Founded in 1991, Cambridge is a systems integration and consulting firm based in Cambridge, Massachusetts. Its stock has been publicly traded on NASDAQ since its initial public offering in 1993. See Sims Aff. ¶ 1. From 1991 to 1997, the company was an explosive success with revenues growing from $9,000,000 to $430,329,000 over the period. See id. ¶ 2. From 1993 through the close of the second quarter of 1998, Cambridge never missed analysts' expectations. See id. ¶ 3.

During early 1998, Cambridge began negotiating for the acquisition of Excell. See Cambridge App. Ex. 11 at 32-42; Ex. 12 at 15-19. The parties undertook extensive negotiations regarding the merger. See O'Hare Aff. ¶¶ 3-6. Section 5.8 of the Merger Agreement contained a representation and warranty by Cambridge that "[s]ince June 30, 1998, there has not been any material adverse change in the Business Condition of Cambridge." Cambridge App. Ex. 7. The term "Business Condition" was defined as follows: "As used in this Agreement, `Business Condition' with respect to any entity means the business, financial condition, results of operations, assets or prospects (as defined below)...." Id. at § 3.1. The term "prospects" was given the following meaning: "[P]rospects means events, conditions, facts or developments that are known to Excell and that in the reasonable course of events are expected to have an effect on future operations of the business as presently conducted by Excell ...." Id.

On August 27, 1998, an information statement was distributed to Excell shareholders disclosing the terms of the Merger (the "Information Statement"). See id. Ex. 8. The Information Statement contained a three-page section describing twelve risk factors that shareholders were encouraged to consider prior to approving the Merger. See id. One section, entitled "Variability of Quarterly Operating Results," warned:

Variations in Cambridge's revenues and operating results occur from time to time as a result of a number of factors .... The timing of revenues is difficult to forecast because Cambridge's sales cycle is relatively long in the case of new clients and may depend on factors such as the size and scope of assignments and general economic conditions. Because a high percentage of Cambridge's expenses are relatively fixed, a variation in the timing of the initiation or the completion of client assignments, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in losses .... Operating results and liquidity may be adversely affected if market demand and revenues do not increase as anticipated.

Id. at 8-9. Pacheco executed an investor agreement (the "Investor Agreement") on August 31, 1998, in which he represented and warranted that he received and reviewed the Information Statement; understood that his investment in Cambridge stock involved risk; consulted his own attorney, accountant or investment advisor regarding the Merger; and was either an "accredited investor" or was knowledgeable and experienced in financial matters. See Cambridge App. Ex. 9. The Investor Agreement also contained a provision that stated, "Cambridge has made available to you ... the opportunity to ask questions and receive complete and correct answers from representatives of Cambridge concerning the terms and conditions of the Cambridge Common stock and to obtain any additional information relating to the financial condition and business of Cambridge." Id. ¶ 4.

In early August, 1998, Cambridge convened a meeting of the company's top officers (the "Operating Committee"). Notes from that meeting indicate that among several issues constituting the "charter of the group" was the "Q3 and Q4 crisis — what can we do to deal with this?" Wolohojian Aff. Ex. 12. On August 10, 1998, the Operating Committee discussed a "[d]efinite demand problem." Id. On August 17, 1998, the Operating Committee notes reflect that Bill Siebel was "scared to death about Q3" in some unspecified respect. Id. Ex. 16. On August 24, 1998, the Operating Committee notes state that Jim Sims ("Sims"), the Chief Executive Officer of Cambridge, believed there was a "demand problem in every unit except Peter Chadwick," and that a "dramatic solution is needed before our next numbers release." Id. Ex. 14.

On August 26, 1998, Sims informed Pacheco that "(a) there were not going to be any more surprises; (b) Cambridge would meet analysts' expectations for the third quarter; and (c) the third quarter was going to be a great quarter." Compl. ¶ 5.10. In addition, at all times prior to August 31, 1998, Cambridge was forecasting that it would hit $162,000,000 in revenues and $.25 per share in earnings for the third quarter of 1998 (the "Third Quarter"). See Cambridge App. Ex. 10; Toscanini Aff. ¶¶ 9-11.

On August 27, 1998, Sims told Bruce Glazier of Wellington Management that the market's expectations for...