Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

IN RE IKON OFFICE SOLUTIONS

September 14, 1999

IN RE IKON OFFICE SOLUTIONS, INC. SECURITIES LITIGATION.


The opinion of the court was delivered by: Katz, Senior District Judge.

  MEMORANDUM & ORDER

This securities fraud action was originally brought against defendants Ikon Office Solutions, Inc., and several of its officers and directors by plaintiffs who had purchased Ikon stock. Several months after the original complaint was filed, the plaintiffs were granted leave to file an amended complaint that added Ernst & Young, Ikon's accounting firm, as a defendant. Ernst & Young now moves for dismissal of the two counts in which it is named.*fn1

I. Background

Ikon supplies copiers, printing systems, and related services throughout the United States, Canada, and Europe. Its shares are actively traded on the New York Stock Exchange. Beginning in 1995 and continuing into 1998, Ikon purchased close to 200 independent companies, which Ikon then attempted to integrate into its own network. Ikon experienced a variety of problems associated with this "transformation program," particularly with respect to its internal auditing procedures. After a special review procedure" in the summer of 1998, on August 14, 1998, Ikon announced a $110 million charge to earnings-$94 million in the third fiscal quarter and $16 million against previously reported second fiscal quarter earnings. See Compl. ¶ 97.*fn2 Following this charge, Ikon's stock dropped sharply.

The present motion centers on the role Ernst & Young (E & Y) may have played in these problems. Plaintiffs' claims against E & Y are made under Section 11 and Section 10(b) of the Securities Act of 1933 and the Securities Exchange Act of 1934, 15 U.S.C. § 77k, 78j(b). Plaintiffs allege that E & Y violated these statutes by (1) issuing an unqualified audit report dated October 15 and 27 of 1997 for the fiscal year ending September 30, 1997, stating that financial statements issued by Ikon conformed with Generally Accepted Accounting Principles (GAAP) and that E & Y's audit itself complied with Generally Accepted Accounting Standards (GAAS),*fn3 see Compl. ¶ 109*fn4; and (2) permitting the incorporation by reference into a May 1997 securities registration statement of a false or misleading audit opinion on Ikon's fiscal 1996 financial statements. See id. ¶ 182. Although the court will subsequently discuss the particular allegations in more detail, plaintiffs focus on several specific problems: internal controls, doubtful accounts, lease default reserves, overstatement of subsidiary income, and allegations that one of Ikon's officers was "cooking" the books. Plaintiffs allege that E & Y was aware of these problems from a very early date but nonetheless continued to issue unqualified statements regarding Ikon's finances.

II. Legal Standard

A motion to dismiss should be granted only if, accepting all facts pleaded as true and viewing them in the light most favorable to plaintiffs, plaintiffs are still not entitled to relief. In making this assessment, the court should not look to whether plaintiffs will "ultimately prevail"; it should only consider whether they are allowed to offer evidence in support of their claims. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997) (citations omitted). Complaints alleging securities fraud must also comply with Federal Rule of Civil Procedure 9(b), which requires that fraud be averred with particularity. See Fed.R.Civ.P. 9(b).

III. Section 10(b) Claims

A. Standards

Section 10(b) of the Securities Exchange Act makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security, . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe[.]" 15 U.S.C. § 78j(b). Rule 10b-5, in turn, states in relevant part that it is unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading[.]" 17 C.F.R. § 240.10b-5 (b).

The Third Circuit explained the obligations of a plaintiff alleging violations of these requirements:

  The first step for a Rule 10b-5 plaintiff is to
  establish that defendant made a materially false or
  misleading statement or omitted to state a material
  fact necessary to make a statement not misleading.
  Next, plaintiff must establish that defendant acted
  with scienter and that plaintiffs reliance on
  defendant's misstatement caused him or her injury.
  Finally, since the claim being asserted is a "fraud"
  claim, plaintiff must satisfy the heightened pleading
  requirements of Federal Rule of Civil Procedure 9
  (b).

In re Burlington Coat Factory, 114 F.3d at 1417 (citations omitted); see also 15 U.S.C. § 78u-4 (b)(1) (plaintiffs alleging Rule 10b-5 violations must "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading").

As plaintiffs have identified the statements in question and defendant has not challenged materiality, the court must look to the scienter and fraud pleadings. A plaintiff must plead facts giving rise to a "strong inference" that the defendant possessed the requisite scienter, that is, the intent to commit fraud. That strong inference of fraud may be established either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." In re Burlington Coat Factory, 114 F.3d at 1418.

The court also acknowledges the requirements of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 (b)(1), which state:

  In any private action arising under this chapter in
  which the plaintiff may recover money damages only on
  proof that the defendant acted with a particular state
  of mind, the complaint shall, with respect to each act
  or omission alleged to violate this chapter, state
  with particularity facts giving rise to a strong
  inference that the defendant acted with the required
  state of mind.

15 U.S.C. § 78u-4 (b)(2). The Reform Act does not materially change this court's analysis. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999) ("[I]t remains sufficient for plaintiffs [to] plead scienter by alleging facts establishing a motive and an opportunity to commit fraud, or by setting forth facts that constitute circumstantial evidence of either reckless or conscious behavior.")*fn5; In re Cendant Corp. Litig., 60 F. Supp.2d 354, 368-69 (D.N.J. 1999) (discussing Advanta holding and explaining that Reform Act does not substantially change analysis in this circuit). While the Reform Act does require plaintiffs to state facts with particularity, this language simply reflects the existing requirements of Rule 9. See In re Advanta, 180 F.3d at 534.

The third step is meeting the requirements of Rule 9(b). To do so, plaintiffs must plead "(1) a specific false representation of material fact, (2) knowledge of its falsity by the person who made it, (3) ignorance of its falsity by the person to whom it was made, (4) the maker's intention that it should be acted upon, and (5) detrimental reliance by the plaintiff." In re Burlington Coat Factory, 114 F.3d at 1421, citing In re Westinghouse Sec. Litig., 90 F.3d 696, 710 (3d Cir. 1996).

B. Pleadings in this Case

1. Failure to Plead Identity

E & Y first argues that the complaint must be dismissed because plaintiffs have alleged wrongdoing by E & Y collectively rather than by naming particular individuals. The court agrees with plaintiffs that they have pleaded identity sufficiently, especially since no individual defendants are named. The statements in question were issued as representations of the corporation Ernst & Young, and it is untenable to suggest that a plaintiff must, at the pleading stage, be, able to identify each Individual accountant or researcher who may have worked on a particular project. To do so would make the pleading standard virtually impossible to meet. In many places, the plaintiffs have referred to particular memoranda, speakers, or workpapers when there is need for a more particularized allegation, and E & Y cannot ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.