Opinion
Civil Action No. 00-10874-RWZ.
June 23, 2006
MEMORANDUM OF DECISION
This securities fraud class action was filed in May 2000. Eventually, plaintiffs RAM Trust Services, Inc., and Lens Investment Management, LLC ("plaintiffs") were designated lead plaintiffs under the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4, and Judge Lindsay, to whom the case was originally assigned, permitted them to file an amended complaint ("First Amended Complaint"). The First Amended Complaint set forth three main categories of factual allegations. First, plaintiffs alleged that Stone Webster ("SW"), an engineering firm, "deliberately underbid on more than a billion dollars of contracts . . . so as to overstate earnings." In re Stone Webster, Inc. Sec. Litig., 414 F.3d 187, 192 (1st Cir. 2005). Second, plaintiffs alleged "that SW fraudulently concealed its loss on a huge contract in Indonesia with Trans Pacific Petrochemical Indotama ("TPPI") . . . and thus reported unreceived revenues." Id. Third, plaintiffs alleged "that SW made public statements, which concealed and misrepresented its shortage of liquid reserves and its impending bankruptcy." Id.
In addition to SW, plaintiffs named as defendants (1) H. Kerner Smith, SW's former chairman, president, and CEO; (2) Thomas Langford, its executive vice president and CFO; and (3) PricewaterhouseCoopers, LLC ("PwC"), its auditor. After SW filed for bankruptcy, the suit proceeded against the individual defendants and PwC. Plaintiffs sued all defendants under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and associated Rule 10b-5, as well as § 18 of the Exchange Act, 15 U.S.C. § 78r. Plaintiffs also sued Smith and Langford under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as persons in control of SW.
Defendants filed motions to dismiss, and in March 2003, Judge Lindsay granted PwC's motion in its entirety and granted most of Smith and Langford's motion. In re Stone Webster, Inc., Sec. Litig., 253 F. Supp. 2d 102, 136 (D. Mass. 2003). His decision was based primarily on plaintiffs' failure to meet the pleading requirements of the PSLRA and Fed.R.Civ.P. 9(b). Plaintiffs then filed a motion seeking leave to amend the First Amended Complaint (the "First Motion"), which Judge Lindsay denied on the basis of undue delay. In re Stone Webster, Inc., Sec. Litig., 217 F.R.D. 96 (D. Mass. 2003). The remaining claims against Smith and Langford were ultimately decided in defendants' favor in an order entered September 23, 2003.
Plaintiffs appealed all three rulings to the First Circuit, which issued a decision in July 2005 affirming in part, vacating in part, and remanding. In re Stone Webster, Inc., Sec. Litig., 414 F.3d 187 (1st Cir. 2005). Specifically, the First Circuit:
(1) affirmed the dismissal of all § 10(b) claims based upon the allegedly underbid contracts, id. at 201;
(2) affirmed the dismissal of all claims based upon inclusion of underbid contracts in SW's "backlog," id. at 202;
(3) affirmed the dismissal of the § 10(b) claims regarding TPPI brought against Smith and Langford, id. at 206;
(4) affirmed the dismissal of the § 10(b) claims against PwC based upon its audit opinions, id. at 215;
(5) vacated and remanded the §§ 18 and 20(a) claims based on the allegedly underbid contracts, id. at 202;
(6) vacated and remanded the §§ 18 and 20(a) claims based upon the TPPI deal, id. at 206;
(7) vacated and remanded all claims "against Smith and Langford for false statements as early as January 1999 and thereafter relating to the Company's liquidity and financial condition," id. at 212; and
(8) vacated and remanded the § 18 claim against PwC, id. at 215.
With respect to Judge Lindsay's denial of plaintiffs' motion for leave to amend, the First Circuit "found no abuse of discretion," though it noted in dicta that plaintiffs could, on remand, reassert the motion. Id. Plaintiffs have now filed a Second Motion for Leave to File a Second Consolidated and Amended Class Action Complaint (the "Second Motion"), and defendants oppose. The motion is denied.
Plaintiffs' Second Motion is substantially identical to its First Motion. It asks "to add [to the First Amended Complaint] the factual allegations the First Motion addressed." (Pls.' Mem. in Supp. of Second Motion 2; see also id. at 22 (incorporating First Motion into Second Motion)). Judge Lindsay previously denied plaintiffs' request for leave based upon a finding of undue delay, and the First Circuit expressly found "no abuse of discretion in that ruling." 414 F.3d at 215. In situations where, as here, "a successor trial judge . . . steps in to complete a pending case," the doctrine of law of the case requires that "a legal decision made at one stage of a . . . proceeding should remain the law of that case throughout the litigation, unless and until the decision is modified or overruled by a higher court." United States v. Moran, 393 F.3d 1, 7 (1st Cir. 2004). With respect to the amendments already sought by plaintiffs in their First Motion, I am therefore bound by Judge Lindsay's earlier ruling. Of course, the doctrine allows for reconsideration in certain limited circumstances, such as significant new evidence, a change in controlling law, or manifest injustice. Ellis v. United States, 313 F.3d 636, 647-48 (1st Cir. 2002). But plaintiffs have offered no compelling ground for reconsideration in this case. Instead, they persist in characterizing the allegations raised in their First Motion as "newly discovered facts" justifying amendment. (Pls.' Mem. in Supp. of Second Motion 22). And yet Judge Lindsay's opinion makes clear that the evidence at issue was in fact not "newly discovered" at the time plaintiffs filed the First Motion, but was "in fact available to them during the pendency of the motions to dismiss." 217 F.R.D. at 98. Accordingly, to the extent that plaintiffs' Second Motion raises the same arguments and seeks leave to make the same amendments as the First Motion, it is denied.
Plaintiffs do rely on one piece of new evidence as grounds for amendment — a memorandum prepared by Baker McKenzie, retained as independent counsel by SW to advise on certain aspects of the TPPI deal, which plaintiffs discovered when it was filed in a separate action involving SW's successor shortly after oral argument before the First Circuit in this case. According to plaintiffs, this memorandum shows that Smith and Langford were aware of, and participated in, an undisclosed plan to pay a $147 million kickback to one of the Indonesian parties involved in the TPPI deal. The proposed kickback was never disclosed in SW's public filings, which listed the contract price as $710 million, rather than $950 million. The memorandum reveals that the $147 million payment was never ultimately made, but that Baker McKenzie nevertheless concluded that SW might be liable for activities related to that proposed kickback.
Claims brought under §§ 10(b) or 18 of the Exchange Act are subject to a one-year statute of limitations and a three-year period of repose. See Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350, 360 n. 6, 364 (1991). These limitations periods also apply to § 20(a) claims, which are derivative in nature. See Dodds v. Cigna Secs., Inc., 12 F.3d 346, 349-50 n. 2 (2d Cir. 1993). The three-year period of repose begins to run on the date that the fraudulent activity occurred, which in securities fraud cases is the date of the defendant's last fraudulent misstatement. See Quaak v. Dexia S.A., 357 F. Supp. 2d 330, 337 (D. Mass. 2005). Because it is not subject to tolling, see Lampf, 501 U.S. at 360-64, the three-year period may expire "before the plaintiffs discovers the fraud," Neal v. Honeywell, Inc., 33 F.3d 860, 865 (7th Cir. 1994). In this case, none of defendants' alleged misrepresentations occurred later than 2000. Thus, the three-year statute of repose ended in 2003, well before plaintiffs raised these allegations in their Second Motion, which was filed on December 16, 2005. Accordingly, any claim plaintiffs might assert based upon the Baker McKenzie memorandum is time-barred.
The Sarbanes-Oxley changed both periods, but only for actions commenced after July 30, 2002. See Zouras v. Hallman, No. 03-240-SM, 2004 WL 2191034, at *15-16 (D.N.H. 2004).
Nor are plaintiffs entitled to the benefits of Fed.R.Civ.P. 15, which allows, in some circumstances, a new claim or set of allegations that would otherwise be time-barred to "relate back" to the date of filing the initial complaint. That rule applies only where "the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." Fed.R.Civ.P. 15(c)(2). Rule 15(c)(2) does not apply where the amended complaint concerns "new or distinct conduct, transactions, or occurrences as the basis for relief," McGregor v. Louisiana State Univ. Bd. of Sup'rs, 3 F.3d 850, 863 (5th Cir. 1993), or raises allegations "not even suggested in the original complaint," O'Loughlin v. Nat'l R.R. Passenger Corp., 928 F.2d 24, 26 (1st Cir. 1991). Indeed, courts are more likely to allow amendment under Rule 15(c)(2) where the plaintiff seeks to assert a new legal theory based upon the same facts, than to allow assertion of entirely new facts. E.g., In re Campbell Soup Co. Sec. Litig., 145 F. Supp. 2d 574, 602 (D.N.J. 2001).
In this case, the new allegations concern the TPPI deal raised in the original complaint, but there the similarity ends. Plaintiffs' original TPPI claim was based entirely on defendants' overstatement of revenues and failure to report an expected loss on the project. See 414 F.3d at 202. It had nothing to do with an alleged bribe or kickback scheme. Thus, all of the allegations arising out of the Baker McKenzie memorandum concern entirely "new or distinct conduct." Courts have previously rejected attempts by plaintiffs to raise new factual allegations in an amended complaint via Rule 15(c)(2), simply because such allegations concern a "general fact situation" discussed in the original complaint.See In re Alcatel Sec. Litig., 382 F. Supp. 2d 513, 528 (S.D.N.Y. 2005) (where original complaint alleged misstatements concerning IPO, and focused on "material changes" to defendant's business before the IPO, plaintiff could not relate back claims based on the same misstatements that focused not on the material changes but instead on the defendant's acquisition campaign). Because plaintiffs' allegations concerning the alleged kickback scheme concern an "entirely different factual situation" from the one originally alleged, the first complaint could not have provided defendants with adequate notice that such facts might form the basis for a claim. O'Loughlin, 928 F.2d at 27. Accordingly, Rule 15(c)(2) does not apply, and any claim based upon the Baker McKenzie memorandum is thus time-barred.
Therefore, plaintiffs' Second Motion (#172 on the docket) is allowed to the extent that it seeks to add plaintiffs who purchased SW stock between July 26 and October 27, 1999, but otherwise is denied.