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Wm High Yield Fund v. O'Hanlon

United States District Court, Third Circuit

June 27, 2013

WM HIGH YIELD FUND, et al.
v.
MICHAEL A. O'HANLON, et al.

MEMORANDUM

LEGROME D. DAVIS, District Judge.

Plaintiffs - six institutional Funds[1] that invested in debt securities issued by Diagnostic Ventures, Inc. (DVI) - sue for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5.[2] Jurisdiction is the Exchange Act, 15 U.S.C. § 78aa, and federal question, 28 U.S.C. § 1331.

Defendant Harold Neas, who was an audit partner at Deloitte & Touche LLP - DVI's former independent auditor - moves for summary judgment (Doc. No. 261). Fed.R.Civ.P. 56. The motion asserts that the record is devoid of evidence to support essential elements of a private securities action[3] - a material misstatement or omission by Neas and reliance by the Plaintiff Funds on any allegedly deceptive conduct or statements statements made by Neas.[4]

Plaintiffs oppose summary judgment, asserting that Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc. , 552 U.S. 148 (2008) and Janus Capital Grp., Inc. v. First Derivative Traders , 131 S.Ct. 2296 (U.S. 2011) do not preclude the Section 10(b) claims asserted here against Neas. Pls. Br., Doc. No. 269 at 6; Pls. Supp. Br., Doc. No. 313 at 12-13. They contend that the record presents triable disputes as to the essential elements of a private securities action.[5]

For DVI's fiscal years ended June 30, 1999 through June 30, 2002, it is asserted, Neas directed Deloitte to issue unqualified audit opinions on DVI's annual financial statements, which were "materially false and misleading, " and "an extreme departure" from generally accepted auditing standards (GAAS).[6] Compl. ¶ 249. Neas' signature does not appear on Deloitte's audit opinions, but it is contended that "Plaintiffs relied on the unqualified audit opinions, " and the audit opinions are "attributable directly to Neas." Pls. Br., Doc. No. 269 at 6-7.

Janus was decided after the initial briefing closed on the instant motion for summary judgment. The parties were permitted to supplement their moving papers with concise briefing on significant rulings recently issued by the Supreme Court, our Court of Appeals, and this Court. Feb. 26, 2013 Order, Doc. No. 304.

As permitted, Neas now submits that under Janus and Stoneridge, the record does not contain the requisite "evidence of the reliance and material misrepresentation elements of a Section 10(b) securities fraud claim." Defs. Deloitte's & Neas' Supp. Br., Doc. No. 305 at 6, 5-7. See also Defs. Deloitte's & Neas' Supp. Br., Doc. No. 317 at 9-10; Defs. Deloitte's & Neas' Br., Doc. No. 263 at 1 n.1, 3-4; Defs. Deloitte's & Neas' Br., Doc. No. 286 at 1-3.

Plaintiffs submit that Stoneridge does not preclude Neas' liability. They now effectively acknowledge that no public statements were attributed to Neas; however, it is contended that "managerial employees can be liable for statements not expressly attributed to them." Pls. Supp. Br., Doc. No. 313 at 12-13. Also, they contend that Neas had "ultimate authority" over the audit opinions, including their content and whether and how to communicate them, and therefore, he can be held liable under Janus for Deloitte's audit opinions. Id.

The motion for summary judgment will be granted. The record does not show that Defendant Neas made any public statements that affected the market for DVI's securities or that the Plaintiff Funds relied on any public conduct or statements made by or attributable to Neas.

I. PROCEDURAL AND FACTUAL BACKGROUND

The Complaint, as filed on July 19, 2004, avers that during August 10, 1999 through August 13, 2003, the Plaintiff Funds invested in DVI's bonds that traded on the New York Stock Exchange (NYSE) - 97/8 percent "Senior Notes, " which had been issued in 1997 and 1998, and were due on February 1, 2004.[7] Compl. ¶¶ 1, 12, 285. During that four-year period, it is averred that Deloitte and Neas, individually and together with other DVI officers, directors, and business entities "engaged in a scheme to falsify DVI's financial results and overstate its earnings by at least $120 million." Id . This was done to "deceive... the investing public as to the true financial condition of DVI, " and "artificially inflate and maintain the market price of DVI's securities" - all in violation of Section 10(b) and Rule 10b-5(a), (b), and (c). Id . ¶¶ 6, 277-279, 291-299 (Count I).

In regard to Neas, the gravamen of the Complaint avers that for fiscal years ended June 30, 1999 through June 30, 2002, "Deloitte, at the direction of Neas, issued unqualified audit opinions on DVI's annual financial statements... stating that Deloitte's audits were conducted in accordance with GAAS and that, in Deloitte's opinion, DVI's financial statements present[ed] fairly, in all material respects' DVI's and its subsidiaries' financial position, results of operations, and cash flows for those fiscal years in accordance with GAAP." Compl. ¶ 249; see also id. ¶¶ 5, 47-49, 107, 113, 127, 129, 139, 141, 166, 168. Other than the averment that Neas "directed" and "supervised" Deloitte's auditing of DVI, the Complaint does not contain averments of Neas' individual wrongdoing. See, e.g., id. ¶¶ 224, 229, 240, 249, 261, 267. Instead, it is averred that Deloitte improperly conducted the audits. Id.

It is averred that Deloitte's audit opinions "were materially false and misleading... and an extreme departure from GAAS." Compl. ¶¶ 1, 249, 277-279, 297. And the manner in which DVI reported its financial results as part of its annual Form 10-K filings "represented an extreme departure from GAAP." Id . ¶¶ 249, 248-279 (detailing alleged auditing and accounting deficiencies). Plaintiffs: "Without these materially false and misleading unqualified audit opinions, the fraud could not have been perpetuated." Id . ¶ 279.

On November 1, 2004, Deloitte and Neas jointly moved to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6). Defs. Mot, Doc. No. 53. It was ruled that all claims against Neas were dismissed except those asserting liability under Section 10(b) and Rule 10b-5.[8] See WM High Yield Fund v. OHanlon, No. 04-3423 , 2005 WL 6788446, at *6-8, 18 (E.D. Pa. May 13, 2005) (Apr. 29, 2005 Order and May 13, 2005 Amended Mem., Doc. Nos. 108, 112; and Feb. 23, 2006 Order, Doc. No. 165). It was also ruled that to the extent Plaintiffs sought to hold Neas, among other Defendants, "liable as secondary' violators" under Section 10(b), those claims were dismissed. Feb. 23, 2006 Order, Doc. No. 165; see also WM High Yield Fund , 2005 WL 6788446, at *7 (ruling that Cent. Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A. , 511 U.S. 164 (1994) precluded "secondary" or "aiding and abetting" liability).

II. SUMMARY JUDGMENT FINDINGS OF UNDISPUTED MATERIAL FACT

1. The Complaint does not contain any averments that Neas made a public statement about DVI - at any time, to anybody. See also Def. Neas' Statement of Facts (SOF) ¶¶ 3, 6-7, Doc. No. 261-2, & Pls. ...


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