Wyser-Pratte Management Co., Inc. v. Telxon Corp.

• Decision Date: 28 June 2005
• Docket Number: No. 04-3240.,04-3240.
• Citation: 413 F.3d 553
• Parties: WYSER-PRATTE MANAGEMENT CO., INC., Plaintiff-Appellant, v. TELXON CORPORATION, et al., Defendants, PricewaterhouseCoopers, LLP, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

413 F.3d 553

WYSER-PRATTE MANAGEMENT CO., INC., Plaintiff-Appellant, v. TELXON CORPORATION, et al., Defendants PricewaterhouseCoopers, LLP, Defendant-Appellee.

No. 04-3240.

United States Court of Appeals, Sixth Circuit.

Argued: April 26, 2005.

Decided and Filed: June 28, 2005.

ARGUED:

John C. Kairis, Grant & Eisenhofer, Wilmington, Delaware, for Appellant. Geoffrey F. Aronow, Heller, Ehrman, White & McAuliffe, Washington, D.C., for Appellee.

ON BRIEF:

John C. Kairis, Grant & Eisenhofer, Wilmington, Delaware, Brian E. Dickerson, Keith W. Schneider, Maguire & Schneider, Columbus, Ohio, for Appellant. Geoffrey F. Aronow, Heller, Ehrman, White & McAuliffe, Washington, D.C., Pete C. Elliott, Benesch, Friedlander, Coplan & Aronoff, Cleveland, Ohio, Jeffrey L. Handwerker, Arnold & Porter, Washington, D.C., for Appellee.

Before: GUY, BATCHELDER, and GIBSON, Circuit Judges.^*

GUY, Circuit Judge.

Plaintiff, Wyser-Pratte Management Co., Inc. (WPMC), appeals from the district court's decision to dismiss, on statute of limitations grounds, the common law fraud claims it asserted against PricewaterhouseCoopers, LLP (PwC). WPMC's complaint, filed on June 11, 2002, alleged that PwC, as well as Telxon Corporation and four of its former officers (Telxon defendants), engaged in a deceptive scheme to falsely inflate Telxon's financial results from at least March 31, 1996, through December 11, 1998. WPMC, an investment management firm that purchased and held Telxon stock, brought five counts of federal securities fraud against the Telxon defendants, as well as four counts of state law fraud and negligent misrepresentation against PwC.

WPMC and the Telxon defendants have settled, and WPMC has expressly abandoned its negligent misrepresentation claims. As such, WPMC's appeal is limited to the portion of the district court's June 4, 2003 Order dismissing the state law fraud claims as barred by the applicable, two-year statute of limitations. WPMC argues that it was error for the district court to find, as a matter of law, that WPMC "knew, or had reason to know of the facts by reason of which the actions of [PwC] were unlawful" no later than February 23, 1999. OHIO REV. CODE § 1707.43(B). WPMC further contends that the district court erred in finding that the limitations period was not tolled by the shareholder class action lawsuits commenced against Telxon on December 11, 1998, and against PwC on May 3, 2001. See Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 350, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983). After review of the record, the arguments presented on appeal, and the applicable law, we AFFIRM the district court's dismissal of WPMC's fraud claims.

I.

A. Introduction

PwC, or its predecessor Coopers & Lybrand, LLP, served as Telxon's outside auditors from October 1990 until the relationship was terminated in July 1999. Telxon designs, manufactures, and distributes transaction-based wireless and mobile information systems (including, for example, retail bar-code scanners). Although Telxon became a wholly owned subsidiary of Symbol Technologies (Symbol) in November 2000, Telxon was an independent company whose stock was traded on the NASDAQ exchange at all times relevant to WPMC's fraud claims.

WPMC alleges that the Telxon defendants acted with PwC to falsely inflate Telxon's financial results in the audited financial statements for fiscal year (FY) 1996, FY 1997, and FY 1998, as well as the unaudited statements for the first two quarters of FY 1999 (ending June 30 and September 30, 1998). The individual defendants were officers during the alleged fraud. Frank Brick was promoted to president of Telxon in June 1996, and then served as chairman and CEO from February 1997 until his termination in March 1999. Kenneth Haver was Telxon's CFO and senior vice-president of finance and administration from March 1995 until his termination in March 1999. WPMC named two other former officers as defendants: James Cleveland, who was president from February 1997 through January 2000; and Gary Grant, who served as controller from 1997 through September 2001.¹

During Brick's tenure, Telxon reported improved financial results and purported to "meet or beat" expectations for eleven consecutive quarters. In April 1998, Symbol Technologies made its first offer to buy out Telxon stock at a premium—offering $38 per share at a time when the stock was trading at $24.75. Brick touted Telxon's improved financial condition and its ability to generate consistent and predictable growth in the future. In May 1998, Telxon rejected Symbol's offer as too low. On June 2, 1998, Symbol offered $40 per share, or $42 per share in cash and stock. Telxon rejected the offer the same day, and WPMC began buying Telxon stock.

WPMC alleges that its decision to invest in Telxon was based on Brick's public statements about Telxon's financial results, the audited financial statements for FY 1996 and FY 1997, and PwC's certifications that the statements were prepared in compliance with Generally Accepted Auditing Principles (GAAP) and that its audits were conducted in accordance with Generally Accepted Auditing Standards (GAAS). WPMC even inputed the data from the FY 1996 and FY 1997 statements into a computer modeling program and analyzed the results before deciding to accumulate Telxon stock.

Between June 2 and June 11, 1998, WPMC purchased 730,000 shares of Telxon stock, representing 4.9% of the outstanding shares, and launched a proxy fight to force a change in the board of directors. The proxy fight resulted in litigation, which was settled in August 1998. Telxon agreed that it would not invoke a "poison pill" if it received a fully financed cash offer for more than a specified premium. As a result of the settlement, WPMC's candidate joined the board of directors in November 1998. By December 11, 1998, WPMC had purchased nearly 900,000 shares of Telxon stock for more than $28 million.²

In November 1998, Telxon advised Symbol that it would accept $40.25 per share if the deal were closed quickly and without an examination of the books. As was reported in the Wall Street Journal on December 24, 1998, Symbol insisted on looking at the books "and what they found not only helped derail a $900 million takeover, but also was followed within a single week by a restatement of Telxon's earnings for the quarter ending September 30."

Symbol advised Telxon that its due diligence uncovered $14 million in improperly recognized revenue at the close of the second quarter (2Q) of FY 1999 (ending September 30, 1998), for purported sale of equipment to one of its value added retailers when there was no end buyer and the sale was indirectly guaranteed by Telxon. This, WPMC claims, was a clear violation of GAAP and accounted for a 47% jump in profits before nonrecurring items for 2Q FY 1999. Without this treatment, Telxon revenue would have been flat and Telxon would have shown a quarterly loss.³

B. Restatements

On December 11, 1998, Telxon announced that it would have to restate its financial results for 2Q FY 1999, "to reflect a change in the timing of recognizing revenues financed under a new floor-plan arrangement, to a segment of its Value-Add Distributor (VAD) channel." Telxon also indicated that it expected to report a net loss for that quarter of $.05 per share instead of the previously announced net earnings of $.22 per share. That same day, Telxon stock fell from $27.25 to close at $15 per share and the first shareholder class action suits were filed against Telxon, Brick, and Haver.

In late January 1999, Telxon announced a further delay in the restatement of its earnings for 2Q FY 1999. The Wall Street Journal reported that Telxon's management and the board's audit committee were working with PwC to review "certain judgmental accounting matters"; that Telxon was undertaking a "number of operating review initiatives to address the decline in operating results"; and that Telxon expected to incur a loss for all of FY 1999. On February 22, 1999, the Wall Street Journal reported that the SEC had begun a formal investigation of Telxon's auditing practices and of possible insider trading. Telxon's Form 10-Q, filed on February 16, 1999, disclosed the investigation and that Telxon was voluntarily cooperating with the SEC.

In a second restatement on February 23, 1999, Telxon announced that the review of "certain judgmental accounting matters" had been completed by PwC, Telxon's management, and the board's audit committee. The press release stated, in part, that:

Based on that review, with the concurrence of PwC, Telxon will restate its audited financial statements for fiscal years 1996, 1997 and 1998, and its unaudited interim financial statements for the first and second quarters of fiscal 1999. The restatement of the prior audited periods results from the re-evaluation of the accounting treatment of certain discrete transactions, not from the discovery of any irregularities or wrongdoing of the company. The majority of the aggregate restatement is attributable to asset impairments and valuation allowances, with the balance mostly attributable to adjustments of revenue previously recognized for certain transactions.

Telxon also reported that revenues for 2Q FY 1999 were affected by the loss of a $13 million order, delays in the roll-out of two large retail products, and lower than expected demand. While indicating that amended Forms 10-K and 10-Q would follow "as expeditiously as practicable over the coming weeks," Telxon also provided a breakdown of the impact of the restatements on the financial statements for FY 1996, FY 1997, FY 1998, and the first two quarters of FY 1999. In all, the announced restatements essentially wiped out $16.7 million, or $1.01 per share, in net income. On this news, the stock price fell another 16%, to close under $7 per share.

On March 10, 1999, Telxon announced that its CFO, Kenneth Haver, was "no longer with the company" and that a new...