The opinion of the court was delivered by: DONALD J. LEE
Before the Court are multiple motions to dismiss plaintiffs' Amended Consolidated Class Action Complaint (Document No. 44) (the "Amended Complaint") for various reasons, including plaintiffs' purported failure to state a claim upon which relief can be granted, pursuant to Fed. R. Civ. P. 12(b)(6); plaintiffs' untimely service of the Amended Complaint upon certain defendants, pursuant to Fed. R. Civ. P. 4(j); and failure to plead fraud with the particularity required by Fed. R. Civ. P. 9(b). After consideration of the various motions and responses, the memoranda in support and in opposition and the oral presentations of counsel, these motions to dismiss will be denied.
For purposes of these motions, the Court must accept as true all facts alleged in the Amended Complaint, and draws all reasonable inferences in plaintiffs' favor. Holder v. City of Allentown, 987 F.2d 188, 194 (3d Cir. 1993). Viewed in that light, the Amended Complaint sets forth the following relevant facts.
The Amended Complaint was filed on November 4, 1992, on behalf of nearly 50 named plaintiffs individually and as representatives of a large, presently unknown number of similarly situated purchasers (perhaps "thousands") of securities of the Chambers Development Company, Inc. ("Chambers") during the class period from March 18, 1988, through October 20, 1992, excluding the defendants, immediate family members of the individual defendants and corporate affiliates. AC,
PP 6, 36, 39. Plaintiffs bring this action pursuant to sections 11, 12(2) and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k, 771 and 77o; sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and the Securities and Exchange Commission's ("SEC's") Rule 10b-5, 17 C.F.R. § 240.10b-5; and the common law of Pennsylvania.
Chambers, a Delaware corporation having its principal executive offices in Pittsburgh, Pennsylvania, is in the business of solid waste management and provides services to its commercial, residential and business customers for the collection, hauling and disposal of solid waste. AC, P 7(a). Chambers also engineers, constructs, manages and operates solid waste sanitary landfills and, through a subsidiary, provides security and investigative services. AC, P 7(a).
Chambers is sued as primary violator of section 10(b) of the Exchange Act, and SEC Rule 10b-5 and as an issuer under section 11 of the Securities Act, 15 U.S.C. § 77k, as to three public securities offerings accompanied by Registration Statements and Prospectae, namely: the "1989 Debenture Offering," the $ 110,000,000.00 Convertible Debenture
Offering of September 21, 1989; the "1989 Stock Offering" of 2,850,000 shares of Chambers' Class A common stock at $ 25.00 per share, dated April 19, 1989; and the "1991 Stock Offering" of 6,100,000 shares of Chambers Class A common stock at $ 24.875 per share, dated June 13, 1991. P 7(c).
Each Convertible Debenture was convertible by its holder into Class A common stock at $ 42.25 per share (later adjusted to $ 21.125 per share following a two for one split), and was redeemable by Chambers at any time subject to the holder's agreement and a declining premium starting at 6.75% over face value. AC, P 76. In August of 1991, Chambers announced its intention to redeem the debentures effective September 16, 1991. AC, P 96. Virtually all debenture holders converted them into 5,206,988 shares of Class A common stock prior to the redemption date because the market price of Class A common at that time was greater than the face amount of the debentures plus the premium. AC, P 97.
Grant Thornton is a professional firm of certified public accountants and auditors with offices in Pittsburgh, Pennsylvania. Until April 13, 1992, Grant Thornton was Chambers' independent certified public accountant and auditor at all times relevant, specifically with respect to financial statements, annual reports and SEC Form 10-Ks for the years 1987-1990 inclusive. Grant Thornton consented to the use of its name in Chambers' Registration Statements and Prospectae pertaining to the debenture and stock offerings, and certified the accuracy of the 10-K Forms, annual reports and underlying schedules thereto as Chambers' independent public auditor. Grant Thornton is sued as a primary violator of section 10(b) of the Exchange Act and SEC Rule 10b-5, and as an aider and abettor, as well as in its capacity as Chambers' public accountant under section 11(a)(4) of the Securities Act. AC, P 8.
The Amended Complaint also names four individual managing partners of Grant Thornton, Richard Stewart, David Abramson, Domenic Esposito and Charles R. Fallon, as defendants. Mr. Fallon is the managing partner in Grant Thornton's Pittsburgh, Pennsylvania, office, and the others are managing partners in Los Angeles, California, Minneapolis, Minnesota, and New York, New York, respectively. These named partners of Grant Thornton are sued both in their individual capacities and as representative defendants of a putative defendant class of more than 250 Grant Thornton partners located throughout the United States. AC, PP 9-13, 51-56.
Individual Chambers Directors and Officers
Defendant John G. Rangos, Sr. ("J. Rangos, Sr.") was, at all relevant times, the President, Chief Executive Officer, Chairman of the Board of Directors and major shareholder of Chambers. J. Rangos, Sr., signed SEC 10-Q Forms, for nine quarters during the class period, 10-K Forms for the fiscal years ending December 31, 1989 and 1990, and all Registration Statements accompanying the three public offerings. AC, P 14.
Defendant Alexander W. Rangos ("A. Rangos") was at all relevant times an Executive Vice President and member of the Board of Directors of Chambers, and John G. Rangos, Jr. ("J. Rangos, Jr.") was Executive Vice President, Secretary and member of the Board. These defendants, also major stockholders, authorized their father, J. Rangos, Sr., to sign the Registration Statement on their behalf for the 1989 Debenture Offering, and they personally signed the Registration Statements accompanying the 1989 and 1991 Stock Offerings and the 10-K Forms for fiscal years 1989 and 1990. AC, P 15. Plaintiffs allege that A. Rangos sold 100,000 shares of Class A common stock in the 1991 Stock Offering while in possession of nonpublic, materially adverse information. AC, P 15, 16.
Defendants, Michael J. Paretto, John M. Arthur, William E. Moffett, William R. Nelson and Hugh Scott were at all times members of the Board of Directors of Chambers who consented to the use of their names as Directors in connection with the three public offerings, and who either personally signed, or authorized J. Rangos, Sr., to sign on their behalf, some or all of the Registration Statements accompanying said public offerings and the 10-K Forms for fiscal years 1989 and 1990. AC, PP 17-21.
Defendant Frank D. Hutchinson was a member of the Board of Directors of Chambers at all times relevant to the 1989 Debenture and Stock Offerings. He authorized J. Rangos, Sr., to sign the Registration Statement for the 1989 Debenture Offering and the 10-K Form for fiscal year 1989 in his behalf, and he personally signed the Registration Statement accompanying the 1989 Stock Offering. He also consented to the use of his name as being a Director in connection with these two offerings. AC, P 22.
Defendant Richard A. Knight was a member of the Board of Directors of Chambers and its Executive Vice President in charge of Finance (Chief Financial Officer, or "CFO") from August 1990 until on or about April 13, 1992, when he was fired as CFO. From 1976 until 1990, Mr. Knight, then the managing partner of Grant Thornton's Pittsburgh office, was head of the Chambers account team. Knight was responsible for Grant Thornton's signature on the 1989 Debenture Offering and annual independent audits of Chambers' financial statements and reports performed prior to the time that he was hired by Chambers as its CFO. Knight signed several 10-Q Forms in 1990 and 1991, a 10-K Form for fiscal year 1990, the Registration Statement accompanying the 1991 Stock Offering, and he consented to the use of his name as a Director of Chambers in connection with that offering. AC, P 23.
J. Rangos, Sr., A. Rangos, J. Rangos, Jr., Nelson, Knight and Cushma are alleged to be "controlling persons" within the meaning of section 20(a) of the Exchange Act.
Each is alleged to have violated his duty to disseminate complete, accurate and truthful information regarding Chambers' financial condition and to correct promptly any public statements that subsequently became false and misleading, and each is alleged to be liable under sections 10(b) and SEC Rule 10b-5 and section 20(a) of the Exchange Act as primary violators, as controlling persons and as aiders and abettors. AC, P 26.
J. Rangos, Sr., A. Rangos, J. Rangos, Jr., Paretto, Arthur, Moffett, Scott and Cushma are allegedly liable to the plaintiff class under section 11 of the Securities Act for their consent to the use of their names as Directors and their signatures on the various Registration Statements accompanying the three public offerings, and as "controlling persons" pursuant to section 15 of the Securities Act.
AC, P 27-28. Defendants Nelson and Hutchinson are allegedly liable with regard to the 1989 Debenture Offering and 1989 Stock Offering, AC, P 29, and Knight and Stotlemeyer with respect to the 1991 Stock Offering. AC, P 30.
The Underwriter Defendants
The Amended Complaint identifies six domestic or foreign corporations conducting business as broker-dealers and investment advisors who participated in the public securities offerings as "underwriters" as that term is used in section 11(a)(5) of the Securities Act,
15 U.S.C. § 77k(a)(5), and/or as managing underwriters for one or more of the offerings. AC, PP 31-37.
Additionally, Kidder Peabody International Limited ("Kidder International") Swiss Bank Corporation ("Swiss Bank") and SBCI Swiss Bank Corporation Investment Banking ("SBCI") are sued as underwriters of public offerings under section 11(a)(5), and as aiders and abettors of a violation of section 10(b)/Rule 10b-5, for their participation as managing underwriters of the 1991 Stock Offering having "due diligence" responsibilities for the group of underwriters participating in that offering. AC, PP 35-37.
With respect to their claims under section 11 of the Securities Act, plaintiffs request certification of a class of defendants consisting of the 35 underwriters participating in the 1991 Stock Offering and the 58 underwriters participating in the 1989 Stock Offering, with Kidder Peabody, First Analysis, Dean Witter and SBCI named as the representatives of those classes. AC, PP 43-50.
Paragraphs 57-148 of the Amended Complaint set forth detailed and specific averments regarding allegedly false and misleading statements and omissions of material facts made by Chambers' officers and directors and by Grant Thornton throughout the class period. Essentially, plaintiffs claim defendants falsely presented Chambers to the investing public as a dynamic, financially secure company consistently making dramatic profits prior to and during the class period when, in fact, it never made a profit and purposefully hid its actual losses and true net worth through improper "creative" accounting methods that were, until early 1992, publicly approved by Grant Thornton. Plaintiffs' "overview" states that, in various 10-Q and 10-K Forms and annual reports, incorporated into its Registration Statement and Prospectae, Chambers reported steadily and sharply increasing earnings from 1986 to 1991. For example, in 1986 Chambers reported $ 6.8 million before tax earnings and $ 5.1 million net after tax earnings, which grew to earnings of $ 56.8 million and $ 34.4 million, respectively, in 1990. AC, PP 58-59.
These earnings were, according to plaintiffs,
materially false and misleading, and omitted to state the material facts that the Company through improper accounting practices, had since 1985 capitalized millions of dollars of expenses that should have been treated as expenses and employed other improper accounting techniques in violation of GAAP [Generally Accepted Accounting Principles]. . . . Chambers had in fact suffered a loss in each such year. Chambers actually had a negative net worth at various critical times [preceding] its Public Offerings during the Class Period. . . . This information was concealed from the plaintiffs and the other members of the Class throughout the Class Period. The true facts did not begin to be revealed until after the close of the market on March 17, 1992, and have not yet been fully revealed.
The Allegedly Improper Accounting Policy and Practices
Plaintiffs claim Chambers' management "cooked" their books from at least 1985 through 1992 with Grant Thornton's active participation. The chief offending accounting policy, capitalizing millions of dollars of indirect expenses of landfill development as assets instead of as operating expenses charged against income in the year incurred, is said to be unique and completely inappropriate to the landfill/solid waste disposal industry and to have artificially enhanced Chambers' financial picture, and the market value of its securities. These indirect expenses included executive salaries, portions of general overhead and public relations costs. Id. Several other accounting practices are also challenged as being well outside the acceptable norms of the accounting profession, including the failure to treat as expenses substantial amounts of interest expense when Chambers restated its 1991 financial statements on March 17, 1992, and duplicating (double counting) deferrals and capitalizations of certain landfill development costs for several years, both of which practices further overstated earnings and inflated net worth. AC, PP 107-08, 116-19.
Annual reports and 10-K Forms for the years 1988-1990 allegedly contained explicit representations by Grant Thornton that Chambers' financial statements fairly presented its consolidated financial position and verified the results of Chambers operations and cash flows "in conformity with generally accepted accounting principles," e.g., AC, P 68, and that Grant Thornton's audits were "conducted . . . in accordance with generally accepted auditing standards," ("GAAS"), e.g. AC, P 79. Plaintiffs summarize Grant Thornton's involvement in P 101 of the Amended Complaint:
Grant Thornton audited the financial statements contained in each of the Annual Reports and Forms 10-K during the Class Period, which Financial Statements appear in, or are exhibits to, the Prospectuses referred to herein, and consented to the use of its name as an accountant reporting on the financial statements. In every instance, Grant Thornton provided a "clean" opinion, which was "unqualified" as to the Company's treatment of expenses, which stated that Grant Thornton conducted its audit "in accordance with [GAAS] and, that in Grant Thornton's opinion, the financial statements presented fairly, in all material respects, the consolidated financial position of Chambers and its subsidiaries, the results of their operations and their consolidated cash flows during the relevant periods "in conformity with [GAAP]."
In letters to shareholders attached to annual and quarterly reports and in other public announcements during the class period, J. Rangos, Sr., allegedly touted the substantial financial achievements of Chambers and its status as "one of the fastest growing solid waste companies in America," and raved about Chambers' "record" sales and profits, "substantial financial growth," and rosy predictions about the "outstanding results" and "significant growth" expected in the coming years. E.g., AC, PP 78, 85-87, 90-91, 100.
Plaintiffs allege the Chambers defendants knew or recklessly disregarded that its unique accounting policy regarding capitalization of indirect landfill development expenses and other accounting practices and policies violated GAAP, AC, PP 136-143, and that Grant Thornton's various financial reports were materially false and misleading in falsely stating that its audits were conducted in accordance with GAAS. AC, PP 144-46. Furthermore, capitalization of such indirect costs to landfill and other developmental activities was not supported by contemporaneous time sheets or other supporting material, as required by GAAP, and the amount of capitalized interest which was based on the amount of capitalized costs was excessive under GAAP. AC, PP 139-142.
Plaintiffs identify the GAAP violations with references to specific Accounting Principles Board Statements and Financial Accounting Standards Board Statements. AC, PP 136-143. One of the major GAAP transgressions claimed is the failure of Chambers and Grant Thornton to disclose that the unique accounting policy regarding landfill expense capitalization, even if arguably proper, was adopted and applied, even though
the virtually universal industry practice was to expense and not to capitalize such indirect costs. Consequently, capitalizing such costs without disclosing such accounting practice confused and deceived the investing public. Among other things, that nondisclosure was materially misleading with respect to the profitability of Chambers compared with its major competitors. The failure to disclose that Chambers had adopted such an accounting policy violated Opinion No. 22 of the Accounting Principles Board, "Disclosure of Accounting Policies." APB No. 22 states that "a description of all significant accounting policies of the reporting entity should be included as an integral part of the financial statements." It further states:
Disclosure of accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles that materially affect the determination of the financial position, changes in financial position, or results of operations. In general, the disclosure should encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods.. . . .
AC, P 137(f) (Emphasis added).
Disclosure should include "existing acceptable alternatives," the principles and methods "peculiar to the industry even if such principles and methods are predominantly followed in that industry," and any "unusual or innovative applications" of GAAP. Id.
Plaintiffs allege all defendants knew or recklessly disregarded that Grant Thornton's audit reports were materially false and misleading in stating it had conducted the audits in accordance with GAAS, including: Standard of Field Work No. 3 (an "auditor must obtain sufficient competent evidential matter to afford a reasonable basis for expressing an opinion") General Standard No. 2 (auditor must, in all matters relating to the assignment, maintain an independence in mental attitude); American Institute of Certified Public Accountants ("AICPA") Principles of Professional Conduct, Article IV (a member in public practice should be independent in fact and appearance when providing auditing and other certification services); and General Standard No. 3 (requiring due professional care be exercised in the performance of an audit in preparation of a report). AC, PP 144-46.
St. Patrick's Day 1992 and its Aftermath
On March 17, 1992, Chambers publicly announced "it revised its 1991 after-tax earnings downward to $ 1.6 million (or 3 cents per share) from the previously reported after-tax earnings for 1991 of $ 49.9 million (or 83 cents per share)." AC, P 102. Plaintiffs suggest this announcement resulted from the refusal of the new team of Grant Thornton auditors, installed after defendant Knight and two other Grant Thornton accountants went over to Chambers, "to sign off on Chambers' 1991 financial statements." AC, P 102. This revision was made to properly record the indirect landfill development expenses as costs rather than capitalizing them, and included a charge to 1991 earnings to reflect the effect on reported earnings from 1985 forward. AC, P 103. Chambers, however, stated that it was adopting the change in its accounting practices "to recognize ever increasing operational aspects of its business . . . [and that] because of its growth, identification and allocation of these indirect expenses had become increasingly complex." AC, P 108.
Following this announcement, the bottom fell-out of the market for Chambers' Class A common stock, the price of which dropped from $ 30-1/2 on March 17, to a closing price of $ 11-1/2 per share on March 18, 1992. AC, P 106. On April 13, 1992, Chambers issued another press release stating that its revised 1991 earnings reported on March 17, 1992 ($ .03 per share) had been overstated and Chambers no longer believed that its 1991 earnings would "be as much as the $ .03 per share previously announced." AC, P 113. Eventually, Chambers' "accounting adjustments" as of October 1992 necessitated a $ 362 million charge against its accumulated earnings for 1991 and prior years. AC, P 121.
Grant Thornton was fired as Chambers' public accountant and Knight dismissed as CFO on April 13, 1992, although he remains a member of the Board of Directors. AC, PP 114, 117. On April 22, 1992, Chambers filed an SEC 8-K disclosure Form setting forth several events relating to the company's termination of Grant Thornton as its accountant. AC, P 116. Grant Thornton filed an Amendment to the 8-K Form and sent a letter to the SEC dated April 23, 1992, which declared there had been a sudden point of demarcation with Chambers' accounting policies and practices that had been previously endorsed by the Knight-led team. AC, PP 116-117. Plaintiffs quote lengthy excerpts of this letter in their complaint, portions of which are as follows:
We also pointed out that, when Company Personnel work on both operating and development activities; capitalized costs should be supported by contemporaneous time sheets or other supporting details and that we had been surprised and disappointed because the Company had agreed to install such a system for fiscal year 1991. . . .
Later in the meeting, we . . . pointed out that part of our difficulty in obtaining audit satisfaction related to certain indirect costs which they had allocated between development activities and operations. We repeated what we had told them before: such allocation becomes increasingly difficult and unjustifiable as operations mature. Most mature operating companies therefore expense such costs rather than attempt to identify the portion allocable to development activities. . . .
Discussions with Corporate Controller, April 13, 1992
At approximately 9:00 AM April 13, 1992, we advised John Cushma, Chambers' Corporate Controller, that we believed the Company's determination of its 1991 capitalized costs might have included duplicate items. Based on inquiries of several operating personnel concerning this, it had begun to appear increasingly likely that the items had in fact been duplicated, which would reduce the Company's net earning by approximately $ 4,000,000 and result in a net loss for the year. It appears that the Company was aware of the possible duplication for some period of time and had not previously informed us. Before we could seek additional information or conclude on the matter, at approximately 10 AM we were told that the Company wished us to suspend our audit and vacate the premises.
Finally, plaintiffs allege that throughout the class period, the market for trading in Chambers' securities on the American Stock Exchange was "efficient, open and well-developed. The market price of Chambers' securities reacted promptly to disclosure of material information that was not previously disclosed or anticipated. In purchasing Chambers' securities, plaintiffs and the other members of the class relied on the integrity of the offering process, and/or the regulatory process, and/or the market both as to price and as to whether these securities were ...