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California Public Employees' Retirement System v. Wachovia Capital Markets

February 18, 2009

CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, ET AL, PLAINTIFFS,
v.
WACHOVIA CAPITAL MARKETS, LLC, D/B/A WACHOVIA SECURITIES; ERNST & YOUNG LLP; AND BDO SEIDMAN, LLP, DEFENDANTS.



The opinion of the court was delivered by: Terrence F. McVerry United States District Court Judge

MEMORANDUM OPINION AND ORDER

Presently pending before the Court for disposition is the MOTION FOR REMAND, with brief in support, filed by Plaintiffs (Document Nos. 64 and 65), the RESPONSE in opposition filed by Defendant Ernst & Young, LLP (Document No. 102); and the REPLY BRIEF filed by Plaintiffs (Document No. 109). For the reasons that follow, the motion will be granted and this matter will be remanded to the Superior Court of the State of California, County of Los Angeles.

Background

1. The Parties

Plaintiffs are seventy-four (74) pension and other investment funds, which are former holders of 9% Senior Subordinated Notes issued by the now bankrupt Le-Nature's Inc. Plaintiffs contend that Le-Nature's fraudulently overstated its revenues and that Defendants joined Le-Nature's in committing that fraud by issuing "clean" audit opinions that allegedly misstated financial statements and by misrepresenting the value of Le-Nature's. Plaintiffs allege that they lost over $70 million on their Notes when Le-Nature's fraud was disclosed.

Wachovia Capital Markets LLC d/b/a Wachovia Securities ("Wachovia") was the principal investment banker and financial adviser to Le-Nature's. It arranged, promoted and performed other services in connection with multiple credit facilities and securities issuances for Le-Nature's. Wachovia arranged, promoted, and underwrote the Note Offering specifically at issue in this lawsuit.

Ernst & Young LLP ("E&Y") was the outside accountant and auditor to Le-Nature's for the year 2002 and was retained to re-audit Le-Nature's financial statements for the years 2000 and 2001. Accordingly, E&Y issued an audit report with respect to the financial statements for Le-Nature's for the years ended December 31, 2000, 2001, and 2002.

BDO Seidman, LLP ("BDO") was the outside accountant and auditor for Le-Nature's for the years 2003 through 2006, and issued audit reports with respect to the financial statements of Le- Nature's for the years ended December 31, 2003, 2004, and 2005.

2. Le-Nature's, Inc.

While not a party to this litigation, Le-Nature's is a very relevant non-party.

Le-Nature's was in the business of manufacturing, bottling, and distributing an array of noncarbonated beverages. On November 1, 2006, four (4) creditors of Le-Nature's initiated involuntary Chapter 7 bankruptcy proceedings against Le-Nature's, and its wholly owned subsidiaries, Le-Nature's Holdings, Inc., and Tea Systems International, LLC, in the Bankruptcy Court for the United States District Court for the Western District of Pennsylvania.

On November 3, 2006, Le-Nature's and its subsidiaries consented to the filing and elected to convert the case to Chapter 11. On November 7, 2006, the Bankruptcy Court entered an Order designating the bankruptcy case as a Complex Chapter 11 case. See Docket, In re Le-Nature's, Inc., Case No. 06-25454-MBM.

Thereafter, the Chapter 11 trustee commenced an investigation of the company's actual revenues for the years 2002 through 2005 and determined that Le-Nature's had overstated its revenues by well over $100 million each year and by over $200 million in 2005.

On June 18, 2007, the creditors of Le-Nature's submitted a joint proposed reorganization plan (the "Plan") that would, among other things, appoint a "Liquidation Trustee" charged with the principal function to investigate and prosecute estate causes of action and to make distributions to the creditors of the estate. On July 8, 2008, the Bankruptcy Court approved the Plan.

3. Procedural History

Plaintiffs commenced the instant action on April 28, 2008, by the filing of an eleven- count Complaint in the Superior Court of the State of California, County of Los Angeles. Named as defendants were Wachovia, E&Y, and BDO. The claims asserted are private claims possessed by Plaintiffs themselves, are based entirely on California state law, and are brought directly against the three named Defendants. The Complaint asserts multiple state law claims for (i) fraud, (ii) aiding and abetting fraud; (iii) negligent misrepresentation; (iv) fraudulent inducement; and (v) fraudulent failure to correct.

On May 28, 2008, E&Y removed the action to the United States District Court for the Central District of California on the basis of 28 U.S.C. § 1334(b), which permits federal courts to hear proceedings "related to" bankruptcy cases.*fn1

On June 20, 2008, E&Y filed a motion to transfer the case to the Western District of Pennsylvania. On that same day, Plaintiffs filed a motion to remand the ...


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