Opinion
Case No. 03-20854-CIV-LENARD/SIMONTON.
September 22, 2004
ORDER GRANTING DEFENDANTS' MOTION TO TRANSFER VENUE
THIS CAUSE is before the Court on Defendants' Motion to Transfer Venue and Incorporated Memorandum of Law (D.E. 34), filed on May 24, 2004. On July 28, 2004, Plaintiffs filed a Response. (D.E. 49.) On September 7, 2004. Defendants filed a Reply. (D.E. 57.) Upon review of the Motion, the Response, the Reply and the record, the Court finds as follows.
I. Factual Background
This is a class action on behalf of all purchasers of the common stock of Gainsco, Inc. (hereinafter "Gainsco") between November 17, 1999 and February 7, 2002, inclusive (the "Class Period"). (D.E. 28. Am. Compl. at ¶ 1.) Gainsco is an insurance company that traditionally sold commercial trucking insurance.Id. at ¶ 2. In 1998, Gainsco acquired Lalande Financial Group (hereinafter Lalande) based in Miami, Florida. Id. Lalande specialized in underwriting non-standard personal automobile insurance; "non-standard" refers to selling insurance to higher risk individuals. Id. On November 17, 1999, the start of the Class Period, Gainsco announced that it would acquire another company specializing in non-standard personal auto insurance, Tri-State, Ltd. ("Tri-State"), a private company based in North Dakota. Id. at ¶ 3. Tri-State managed its higher risk non-standard auto insurance underwriting by selling many of its policies as ones that could only be renewed each month. Id. If customers failed to pay their premiums on time, their policy could be cancelled immediately. Id.
When Gainsco announced its intent to purchase Tri-State, it did not disclose that Gainsco intended to convert Tri-State's insurance policies to those of subsidiaries of Gainsco and to change the short (one-month) renewal period to a more lenient six-month renewal period with a lengthy "grace period." Id. at ¶ 4. Soon after Gainsco acquired Tri-State on January 7, 2000, Tri-State began losing money. Id. at ¶ 5. According to a confidential witness who served as Vice-President of Gainsco's Actuarial Services, CEO and President Glenn W. Anderson (hereinafter Defendant "Anderson") and CFP Daniel J. Coots (hereinafter Defendant "Coots"), learned almost immediately after the acquisition that Tri-State was losing money. Id. at ¶ 6. A second witness, Lori McKnight, vice-president in Gainsco's Accounting Department, also allegedly will testify that Coots was aware of Tri-State's declining profitability. Id. at ¶ 7. Allegedly, Anderson and Coots did not disclose Tri-State's declining profitability to analysts at quarterly conference calls. Id. at ¶ 8. Furthermore, a confidential witness will allegedly testify that Defendant Anderson requested the witness "hide" Tri-State's poor performance numbers, within Lalande Group's or Gainsco's overall numbers, in order to keep Tri-State's poor performance from the Gainsco Board of Directors.Id. at ¶ 9.
On June 6, 2001, Gainsco filed a declaratory judgment action against the President of Tri-State, Herbert A. Hill. Id. at ¶ 8. Gainsco's Complaint alleged lost profits and managerial problems. Id. Gainsco made no public announcement of the suit and did not file a Form 9-K with the SEC (for unusual or extraordinary corporate events) disclosing the lawsuit. Id. at ¶ 10.
On August 9, 2001, Gainsco stated in a press release that it was selling the agency operations of Tri-State and that it would write off the goodwill, over $5 million, attributable to Gainsco's original investment in Tri-State. Id. at ¶ 11. In addition, Gainsco stated that the "current outlook for its ongoing commercial and Florida nonstandard private passenger automobile business is positive." Id.
On February 7, 2002, the Company issued a press release warning investors that it "expected to report a significant loss for the fourth quarter and year end December 31, 2001." Id. at ¶ 13. The Company also announced that it planned to "discontinue writing commercial lines insurance due to continued adverse claims development and unprofitable results." Id. The Company's stock fell approximately 45% on the news. Id.
The Plaintiff Class, shareholders who purchased Gainsco common stock between the date Gainsco announced its plan to acquire Tri-State and the date Gainsco stock fell 45%, allege that the Defendants Gainsco, Anderson and Coots issued public documents and statements that were materially false and misleading and violated federal securities laws. Id. at ¶¶ 129-131. The Class alleges that "The ongoing fraudulent scheme described in this complaint could not have been perpetrated . . . without the knowledge and complicity of [Defendants Anderson and Coots]." Id. at ¶ 129. The Amended Complaint asserts three Counts: (1) Violations of Section 10(b) of the Security Exchange Act and Rule 10b-5(b) against all Defendants; (2) Violations of Section 10(b) of the Security and Exchange Act and Rule 10b-5(a) (c) against all Defendants; (3) Violation of Section 20(a) of the Security Exchange Act against individual Defendants Anderson and Coots.
II. Procedural Background
The Complaint on behalf of the Plaintiff class was filed by Earl Culp on April 8, 2003. (D.E. 1.) On April 29, 2003, a similar Complaint on behalf of the Plaintiff class was filed by Richard Swoopes, Case No. 03-21069-CIV. On June 27, 2003, Plaintiffs filed a Motion for appointment of David Varney as lead Plaintiff for the shareholder class, for consolidation of this action with the Swoopes action and for approval of lead counsel (D.E. 3), which was denied without prejudice by the Court (D.E. 6). On August 8, 2003, Plaintiffs filed Returns of Service stating that Defendant Gainsco had been served on July 29, 2004 (D.E. 11) and Defendants Anderson and Coots had each been served on July 31, 2004 (D.E. 12, 13). On August 6, 2003, Plaintiffs filed a Renewed Motion for appointment of David Varney as lead Plaintiff, for consolidation of this action with Swoopes, and for approval of lead counsel (D.E. 10), which was granted by the Court on October 16, 2003 (D.E. 20). On February 2, 2004, Plaintiffs filed an Amended Complaint. (D.E. 27.) On March 29, 2004, Plaintiffs filed a Second Amended Complaint (D.E. 28), the operative pleading in this matter. Within two months thereafter, on May 24, 2004, Defendants filed a Motion to Transfer Venue (D.E. 34) and a Motion to Dismiss (D.E. 35).
III. Parties' Arguments
Defendants request that this Court transfer this action to the Northern District of Texas, Fort Worth Division. (Mot. To Transfer at 1.) Defendants argue first that this action could have been brought in the Northern District of Texas. Id. at 2. Defendants argue next that the balance of convenience clearly favors the Northern District of Texas. Id. The named Defendants, Anderson and Coots, are both residents of Texas.Id. Gainsco is a Texas corporation. Id. The statements cited to by the Plaintiffs were allegedly prepared, reviewed and finalized in the Northern District of Texas. Id. The Defendants assert that the majority of the witnesses and documents for this action will be found in the Northern District of Texas. Id. Defendants state that the Parties have identified only three potentially relevant witnesses located in Florida. Id. at 11. The Defendants further argue that Plaintiffs' choice of forum is not entitled to deference. Id. at 3. The named Plaintiffs are not Florida residents. Id. at 2. Furthermore, Plaintiffs seek to represent a class of investors dispersed throughout the United States. Id. at 3. Defendants also argue that the Northern District of Texas has a greater interest in deciding this case than the Southern District of Florida. Id. at 15-16.
Plaintiffs argue first that the Defendants were served with the initial complaint by July 31, 2003, and that they have delayed too long in moving for a change of venue. (Resp. at 12-13.) Plaintiffs further state that Miami-based Lalande constitutes more than half of Gainsco's entire size, and has a strong connection to the Complaint's allegations and evidence. Id. at 14. Plaintiffs state that three witnesses, MacRac Johnston, Carlos de la Torre and Michael Johnston, reside in this District.Id. Plaintiffs further assert that Defendants have provided insufficient proof that a transfer of venue is appropriate. Id. at 15-17. Regarding documents allegedly prepared in the Northern District of Texas, the Plaintiffs argue that in a fraud-on-the-market case the issue is not where documents were prepared, but where they were publicly disseminated — in this case, throughout the country. Id. at 17. Regarding witnesses allegedly in the Northern District of Texas, Plaintiffs assert that the Defendants have not specified the names of these witnesses or outlined their expected testimony. Id. at 15.
IV. Standard of Review
Pursuant to 28 U.S.C. § 1404(a), a federal court may transfer venue within the federal judicial system, "For the convenience of the parties and witnesses, in the interest of justice . . . to any other division or district where [the civil action] might have been brought." "[T]he purpose of the section is to prevent the waste of time, energy and money" and "to protect litigants, witnesses and the public against unnecessary inconvenience and expense." Van Dusen v. Barrack, 376 U.S. 617, 616, 84 S.Ct. 805, 809 (1964). The transfer power is expressly limited by the final clause of 1404(a) restricting transfer to those federal districts in which the action, "might have been brought." Id. If the action might have been brought in the district to which transfer is sought, the following factors are used to determine whether to transfer: the convenience of the parties, the convenience of the witnesses, the relative case of access to sources of proof, the availability of service of process to compel the presence of unwilling witnesses, the cost of obtaining the presence of witnesses, and the public interest. Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 136 F.Supp.2d 1271 (S.D. Fla. 2001) (citing Jewelmasters, Inc. v. May Dept. Stores Co., 840 F.Supp. 893, 895 (S.D. Fla. 1993); Miot v. Kechijian, 830 F.Supp. 1460, 1460 (S.D. Fla. 1993).
A district court has wide discretion to determine whether to transfer for the convenience of parties and in the interests of justice. Weber v. Coney, 642 F.2d 91, 93 (5th Cir. 1981) (per curiam). Defendants, as the moving party, have the burden of persuading this Court that transfer is appropriate. Thermal Technologies, Inc. v. Dade Service Corp., 282 F.Supp.2d 1373, 1375 (S.D. Fla. 2003). A plaintiff's choice of forum should not be disturbed unless it is clearly outweighed by other considerations. Robinson v. Giarmarco Bill, P.C., 74 F.3d 253 (11th Cir. 1996) (stating that shifting of inconvenience from defendant to plaintiff did not justify transfer). Plaintiffs' chosen venue, however, receives less deference when a plaintiff selects a forum which is not his home forum. La Seguridad v. Transytur Line, 707 F.2d 1304, 1307 (11th Cir. 1983); see also Thermal Technologies, Inc., 282 F.Supp.2d at 1376.
V. Analysis
The Court rejects Plaintiffs' argument that Defendants' Motion to Transfer was untimely filed. (Resp. at 12-13.) Although the Defendants were served in late July of 2003 (D.E. 11, 12, 13), lead counsel for the class was not approved until October of 2003. (D.E. 20.) Plaintiffs then filed an Amended Complaint on February 2, 2004 (D.E. 27), and a Second Amended Complaint on March 29, 2004 (D.E. 28). On May 24, 2004, Defendants timely filed a Motion to Transfer Venue (D.E. 34) in response to Plaintiffs' Second Amended Complaint. The Court further notes that this litigation is still in the early stages. This Court issued a Beginning Order, requiring the Parties to confer and submit a proposed joint schedule order, on July 15, 2004. A Scheduling Order has not yet been issued by this Court. Accordingly, it is appropriate for this Court to consider Defendants' Motion to Transfer Venue at this juncture in the proceedings.
As a threshold matter, the Defendants must show that the instant action might have been brought in the Northern District of Texas. 28 U.S.C. § 1404(a). Defendant Gainsco is a Texas Corporation and individual Defendants Coots and Anderson reside in the Northern District of Texas. Defendants are thus subject to jurisdiction, venue and service of process in the Northern District of Texas.
The Court therefore turns to an analysis of the factors relevant to determining which forum would be more convenient for the parties and witnesses, and would be in the interest of justice. 28 U.S.C. § 1404(a). A transfer to the Northern District of Texas would be convenient to the Defendants, and would not impose any additional inconvenience on the Plaintiffs. Defendant Gainsco is a Texas corporation with its headquarters located in Dallas and its accounting and actuarial department located in Fort Worth. Defendants Anderson and Coots both reside in the Dallas-Fort Worth area. The Plaintiff class is dispersed throughout the United States. Neither the lead Plaintiff, David Varney, nor the named Plaintiffs, Culp or Swoopes, reside in Florida. (Mot. To Transfer at 5; see also Ex. A.) Nor have Plaintiffs alleged that the Southern District of Florida would be a closer forum to Varney, Culp or Swoopes than the Northern District of Texas. Accordingly, this Court finds that the convenience of the Parties weighs in favor of a transfer to the Northern District of Texas.
The Court further finds that the convenience of witnesses would best be served by a transfer of this action to the Northern District of Texas. There appear to be only three potential witnesses residing in this District: MacRac Johnston, Carlos de la Torre and Michael Johnson. On the other hand, there are at least seven individuals who are potential witnesses, residing within the Northern District of Texas. Defendant Coots and Anderson, who both reside in the Dallas-Forth Worth area, will be critical witnesses at trial. Lorene (Lori) McKnight allegedly will testify on behalf of the Plaintiff class that Coots was aware of Tri-State's declining profitability when he and Anderson released false and misleading statements to the press. Lori McKnight resides in the Northern District of Texas. (Mot to Transfer; Coots Aff. at ¶ 7(c).) Also, Richard M. Buxton, Gainsco's Senior Vice President for Investor Relations and Mergers and Acquisitions, and Scott A. Marek, an officer in the Investor Relations Department, both assisted in the preparation of the allegedly false and misleading press releases and SEC 10-K and 10-Q filings. Id. at ¶¶ 5, 7(b) 7(c). Both are potential witnesses to the alleged scheme by the Defendants to mislead investors about the financial prospects after the Tri-State acquisition. Buxton and Marek reside in the Northern District of Texas. Also, members of the Audit Committee of Gainsco's Board of Directors will likely have testimony relevant to Plaintiffs' allegation that Defendant Anderson attempted to hide Tri-State's poor financial performance from Gainsco's Board of Directors. Two of the Audit Committee Members reside in the Northern District of Texas; the third resides in Minneapolis, Minnesota. Id. at ¶ 5, 7(h).
In reaching this determination, the Court rejects Plaintiffs' argument that Defendants have not sufficiently specified the identities or expected testimony of witnesses located within the Northern District of Texas. (Resp. at 15.) The Plaintiffs' reliance on J.I. Kislak Mortgage Corp. v. Connecticut Bank and Trust Comp., 604 F.Supp. 346 (S.D. Fla. 1985), is unpersuasive Defendants in the instant action did not make the type of generalized statements criticized by the Court in J.I. Kislak, Id. at 348. Instead, Defendants in this action provided Affidavits that explained which individual employees, which groups of employees, and which individuals outside of the company would be able to testify regarding the preparation of the allegedly false and misleading press releases and SEC filings.
In addition to the seven individuals described above, the Court notes that there are other unnamed potential witnesses located within the Northern District of Texas. Plaintiffs must show the Defendants' scienter, or that Defendants Anderson and Coots made the allegedly misleading and fraudulent representations to investors, with actual knowledge that those statements were false. Theoharous v. Fong, 256 F.3d 1219, 1225 (11th Cir. 2001). To meet this burden of proof, Plaintiffs will seek testimony from witnesses who informed Anderson and Coots of Tri-State's declining profitability prior to or during the time period when Anderson and Coots allegedly hid Tri-State's poor financial performance from the public. Individuals who provided Defendants Anderson and Coots with the raw data and initial reports on Tri-State's profitability are therefore potential witnesses in this action. Plaintiffs may therefore seek to depose members of Gainsco's current or prior accounting staff and KPMG personnel (Gainsco's outside auditors). (Mot. to Transfer; Coots Aff. at ¶ 11.) Most of these potential witnesses still reside in the Northern District of Texas area. Id. at ¶ 7 (f, g). In addition, Plaintiffs may seek to depose the Board Members of Gainsco to determine whether Defendants Coots and Anderson mislead the Board about the Tri-State acquisition and Tri-State's profitability thereafter. See Am. Compl. at ¶ 9. During the class period, ten individuals sat on Gainsco's Board, nine of whom reside in the Dallas-Fort Worth area. Id. at ¶ 11(1).
The Court therefore finds that a transfer to the Northern District of Texas would case the burden of depositions and trial testimony on the majority of the potential trial witnesses, named and unnamed. Pre-trial and trial proceedings in the Northern District of Texas would also reduce the costs of travel and expense reimbursement for many witnesses located within the Dallas-Forth Worth area.
Neither party raised how a transfer of venue would effect the availability of process to compel the presence of unwilling witnesses. Upon its review of the record, the Court finds no reasonable basis to believe this factor would favor retaining venue in the Southern District of Florida.
The Court further finds that transfer of venue to the Northern District of Texas will most likely assist access to sources of proof. The Defendants' preparation of the allegedly false and misleading press statements and SEC filings is relevant evidence tending to show the Defendants' state of mind. Plaintiffs must prove Defendants Anderson and Coots had the requisite scienter in order to show violations of Section 10(b) of the Exchange Act and Rule 10b-5 by the Defendants and violations of Section 20(a) by Defendants Anderson and Coots. To succeed with their federal security claims, the Plaintiffs must prove "(1) a misstatement or omission (2) of a material fact (3) made with scienter (4) upon which the plaintiff relied (5) that proximately caused the plaintiff's loss. Theoharous, 256 F.3d at 1224 (citing McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir. 1989)) (stating the standard for proving a violation of Rule 10b-5). Regarding the scienter element, the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(2), (the PSLRA) describes two relevant "states of mind." For forward-looking statements, a plaintiff must prove that the defendant made the statement with actual knowledge that it was false or misleading. 15 U.S.C. § 78u-5(c)(1)(B)(1); see also Theoharous, 256 F.3d at 1225. For statements that are not forward-looking, a plaintiff must provide facts giving rise to a strong inference that the defendants acted in a severely reckless manner. Theoharous, 256 F.3d at 1225 (citing Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1287 (11th Cir. 1999)). Therefore, the Court finds that the most relevant documents to Plaintiffs' federal securities claims are those which Defendants Anderson and/or Coots received that stated Tri-State's declining profitability and those documents which Anderson and/or Coots prepared or created that allegedly mislead the public about Tri-State's profitability. This second category of documents would include the draft press releases and SEC filings that Anderson and/or Coots prepared to allegedly hide Tri-State's losses.
Section 10(b) of the Exchange Act makes it unlawful "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, promulgated by the SEC, provides that, "It shall be unlawful for any person, directly or indirectly, by the use of any means. . . . (a) to employ any device, scheme or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading, and (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5.
Section 20(a) of the Exchange Act provides for joint and several liability by any person who controlled the corporation and who directly or indirectly induced the corporate conduct or policy which allegedly violated federal securities law. 15 U.S.C. § 78t(a). In order to state a Section 20(a) claim, a plaintiff must first allege a violation of Section 10(a) by the corporation.
Turning to the location of the relevant documents, internal memorandum and reports detailing Tri-State's profitability may exist at Lalande, located in Miami, at Gainsco's accounting and actuarial services, located in Fort Worth, and/or at Gainsco's headquarters, located in Dallas. Documents detailing Tri-State's declining profitability that are physically located at Gainsco's headquarters are perhaps the most telling evidence that Anderson and Coots knew of Tri-State's declining profits. The draft press releases and SEC filings created by Anderson and Coots, with the assistance of Gainsco and KPMG employees, are also located in Dallas and Fort Worth. (Mot. to Transfer; Coots Aff. at ¶¶ 8, 12.) Accordingly, a transfer of venue to the Northern District of Texas may assist access to sources of proof.
Lalande oversaw Tri-State's accounting needs, automobile premium-monitoring and policy writing needs. (Am. Compl. at ¶ 16.) Lalande may have documents relevant to Plaintiffs' allegations that Tri-State lost profits due to Gainsco's conversion of Tri-State's high risk policies to a more lenient renewal period with a lengthy "grace period." Id. at ¶¶ 4-5.
Finally, the Court finds that a transfer to the Northern District of Texas serves the public interest. The Court notes that it puts little weight on the Parties' arguments regarding the relative congestion of this docket compared to the Northern District of Texas. Instead, the Court focuses instead on which forum has a greater stake in the outcome of this litigation. If there was infringing activity by the Defendants, the bulk of that activity occurred and was directed by persons in the Northern District of Texas. Therefore, Defendants' presence and continued operations in the Northern District of Texas provides a strong interest in trying this suit. See e.g., Irwin v. Zila, Inc., 168 F.Supp.2d 1294, 1297 (M.D. Ala. 2001) (stating that a forum has an interest in demanding that its resident corporations adhere to a level of protocol in conducting their business activities, especially when the alleged misdeeds took place within that forum); see also Thermal Technologies, Inc., 282 F.Supp.2d at 1379. In comparison, the Southern District of Florida has a few members of the class, whose financial stake in this litigation in unknown. The other members of the class are dispersed throughout the United States. The Court therefore finds that the Northern District of Texas has a stronger public interest in the outcome of this litigation.
Finally, the Court notes that Plaintiff's choice of forum is due less deference because the Southern District of Florida is not their home forum. La Seguridad v. Transytur Line, 707 F.2d 1304, 1307 (11th Cir. 1983); see also Thermal Technologies, Inc., 282 F.Supp.2d at 1376. Given the Plaintiff's lack of ties to this district and the many factors weighing in favor of a transfer to the Northern District of Texas, it is hereby
ORDERED AND ADJUDGED that
1. Defendants' Motion to Transfer Venue and Incorporated Memorandum of Law (D.E. 34) is GRANTED.
2. Pursuant to 28 U.S.C. § 1404(a), this case is hereby TRANSFERRED to the Northern District of Texas, Fort Worth Division, for the reasons set forth in this Order.
3. The pending Defendants' Motion to Dismiss (D.E. 35) is hereby TRANSFERRED with the instant action. The Parties are instructed to re-file all pleadings for the Motion to Dismiss with the Case Number and Judge assigned by the Northern District of Texas to this action.
4. The Clerk of the Court is instructed to remove the Defendants' Motion to Dismiss (D.E. 35) from the pending motions list for the Honorable Joan A. Lenard.
DONE AND ORDERED.