Opinion
CASE NO: 8:00-cv-212-T-26MSS
March 7, 2001
ORDER
This cause comes before the Court on Defendants', Sykes Enterprises, Inc., John H. Sykes, Scott J. Bendert, and David L. Grimes, Motion to Dismiss (Dkt. 60) and Lead Plaintiffs', Florida State Board of Administration and the Louisiana State Employees Retirement System, Response thereto (Dkt. 65).
Lead Plaintiffs, two state employee pension funds, bring this action on behalf of themselves and all other persons who purchased the common stock of Defendant Sykes Enterprises, Inc. ("Sykes") on the open market during the period commencing July 27, 1998, through and including September 18, 2000 ("the class period"). They are proceeding on their Consolidated Amended Class Action Complaint ("the Complaint"). (Dkt. 58) Plaintiffs sue Sykes and the individuals who held Sykes' highest ranking offices during the class period. The Complaint is based upon two counts. In Count I, Plaintiffs claim violations of Section 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), and Rule 10b-5 promulgated thereunder. In Count II, they claim violations of Section 20(a) of the Exchange Act.
Plaintiffs allege that Defendants materially misled the investing public regarding the success of Sykes' business operations through a series of false statements of revenue and earnings. They contend that Defendants desired to maintain an unbroken streak of meeting or exceeding the consensus expectations of Wall Street analysts in each reporting period since Sykes' initial public offering in 1996. Plaintiffs contend that Defendants boasted of the unbroken streak in public statements and that this contributed significantly to the steadily rising price of Sykes' common stock throughout the class period and helped to fuel a series of corporate acquisitions for which Sykes' inflated stock was the consideration.
Plaintiffs allege that by mid-1998, Defendants, facing the prospect of failing to meet Wall Street estimates, began to employ a variety of improper means to ensure that Sykes would match the analysts' estimates. Among other things, Defendants allegedly backdated receipts of revenue, improperly booked revenue, concealed the contingent nature of certain revenue in side agreements to sales contracts, failed to disclose contingencies in statements to the SEC, and prematurely reported revenue. Plaintiffs argue that Sykes was able to extend its unbroken streak for almost two more years by implementing these "gimmicks." They assert that Sykes' stock value steadily rose and that Sykes continued to expand its operations using over 1.6 million shares of stock. Plaintiffs maintain that Defendants either knew or were extremely reckless in not knowing, that the maneuvers undertaken to "meet the Street" were in violation of Generally Accepted Accounting Principles ("GAAP") and served to deceive the investing public.
Plaintiffs assert that Defendants' scheme to maintain Sykes' stock price began to unravel in February, 2000, when Sykes announced that it was required to restate two reporting periods due to improper revenue recognition practices. Allegedly, the full extent of Sykes' overstated revenue and earnings was not revealed until September 18, 2000. Plaintiffs seek compensatory damages, fees, and costs as relief for their claims.
Defendants seek dismissal of the Complaint on grounds that Plaintiffs fail to plead facts showing a strong inference of scienter. They point out that the Complaint fails to make any allegations of insider trading. They also argue Plaintiffs fail to allege that Defendants were informed by anyone that they were improperly booking revenue or that there were any "red flags" which would have alerted them to their improper revenue recognition. They urge that GAAP violations and restatements of earnings, standing alone, do not give rise to a strong inference of scienter. Defendants also urge that the fact that they held senior management positions does not, standing alone, establish such an inference. Defendants maintain that the Complaint should be dismissed because it fails to allege anything more than that Defendants made a mistake and voluntarily corrected it.
Throughout their Motion, Defendants ask the Court to consider as evidence various exhibits they have submitted. Defendants also seek, at times, to substitute their version of the facts for Plaintiffs' account. At other times, Defendants invite the Court to view certain allegations made by Plaintiffs in isolation. At one point, Defendants even assert that their accounting treatment was reviewed and approved by Sykes' outside auditors and they assert that contract accounting principles are complex. Further, Defendants argue that the only reasonable inference to be drawn in this case is that the GAAP violations were understandable mistakes, not part of a carefully orchestrated scheme to defraud. In sum, Defendants are asking this Court to consider defenses, weigh evidence, make credibility determinations, and rule on the merits of this case, which is inappropriate at this early stage of the proceedings.
On a motion to dismiss, the Court must presume that the Complaint's allegations are true and give Plaintiffs, not Defendants, the benefit of every favorable inference that can be drawn from their allegations.Hishon v. King Spalding, 467 U.S. 69, 73 (1984); Bryant v. Avado Brands. 187 F.3d 1271. 1273 n. 1 (11th Cir. 1999). See also Malin v. IVAX Corp., 17 F. Supp.2d 1345, 1350 (S.D. Fla. 1998) (noting that in a post-Private Securities Litigation Reform Act securities case that, "[w]hen ruling on a motion to dismiss, a court must view the complaint in the light most favorable to the plaintiff and accept the plaintiff's well-pleaded facts as true"). A motion to dismiss "merely tests the sufficiency of the complaint; it does not decide the merits of the case."Elger v. Martin Memorial Health Sys., Inc., 6 F. Supp.2d 1351, 1353 (S.D. Fla. 1998) (citing Milburn v. United States, 734 F.2d 762, 765 (11th Cir. 1984). Further, "consideration of matters beyond the Complaint is improper in the context of a motion to dismiss." Milburn 734 F.2d at 764.
Accordingly, it is ordered:
That Defendants' Motion to Dismiss (Dkt. 60) is denied.