Opinion
Master File No. 01 Civ. 11814 (MP)
May 9, 2003
OPINION
Defendant BDO International B.V. seeks an order: (1) pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure to dismiss the Second Consolidated Amended Class Action Complaint on the grounds that the Court lacks personal jurisdiction over it; or (2) pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Rule 9(b) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4 (1997) to dismiss said complaint on the grounds that the allegations against Defendant lack the particularity necessary to state a claim.
References herein to "Cpt. ¶ ___" are to paragraphs in the Complaint and references to "Hansen Decl. Ex." are to the exhibits attached to the Declaration Of Rochelle Feder Hansen Submitted In Support Of Lead Plaintiff's Opposition To The Motion Of Defendant BDO International B.V. To Dismiss The Second Consolidated Amended Class Action Complaint. References to "BDOI Mem. at ___" and "van Elten Decl. ¶ ___" are to the Memorandum of Law and Declaration of Paul van Elten, respectively, submitted by Defendant in support of its motion.
According to Plaintiffs' allegations in the complaint and supporting materials, BDO International B.V. is the corporate entity through which BDO International operates, Cpt. ¶ 36, and BDO International, through its regional offices, offers a full range of auditing, accounting, tax, financial and management advisory services, and ranks number six on the list of the worlds' largest multinational accounting and consulting services. Cpt. ¶ 29, 194. As detailed by the Plaintiffs, International's business was the business of its member firms and it operated through its member firms, including defendants BDO Minas Iannou, International's Cyprus member firm, and BDO Seidman LLP, International's United States member firm.
"BDO International B.V." and "BDO International" are thus referred to herein interchangeably as "International."
International certified that the financial statements of A.C.L.N. Limited ("ACLN" or the "Company") were fairly presented in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") and that it had reached that determination based on audits that had been conducted in accordance with U.S. Generally Accepting Auditing Standards ("GAAS"). Cpt. ¶¶ 4, 247. According to the complaint, however, ACLN was permeated with financial fraud. Plaintiffs aver that International's "clean" audit reports were false and that International knew, or, but for its recklessness, would have known that they were false. Cpt. ¶¶ 4, 58-175, 197-202, 234-263, 274, 284, 313. International is charged herein with violating Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.15b-5, promulgated thereunder. Additionally, the Complaint alleges that International is liable for violation of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as a control person of the member firms that worked on the ACLN engagement.
The Complaint details a massive fraud at ACLN throughout the Class Period (June 29, 2000 through March 18, 2002). On March 18, 2002, after a two-month investigation, the SE.C. halted trading in the Company's stock. The accounting fraud at ACLN so permeated the Company's financial statements that SEC Assistant Director of the Division of Enforcement observed that ACLN's non-existent assets created a serious hazard to the American investing public and stated that "at this point there isn't verifiable public information about [ACLN] that would support a public stock market. Within hours of the SEC's halting of trading, the New York Stock Exchange ("NYSE ") moved to de-list ACLN's common stock, the first time in 27 years that NYSE had taken this drastic measure. Cpt. ¶¶ 164-173.
In response to the allegations of the Complaint, Defendant asserts that the audit reports were not prepared by BDO International B.V. Defendant claims that BDO International B.V. exists only to license the name "BDO International" and the "BDO" acronym. Yet BDO International B.V. is clearly alleged to be the corporate entity through which BDO International operates, Cpt. ¶ 36, and as such is alleged to have held itself out as a leading multinational accounting and consulting organization (with more than 58% of its revenues coming from audit and accounting services) that, through its principal offices in Brussels, Belgium, imposes strict quality control and uniform standards on its member firms. Cpt. ¶¶ 265-268, 270-274. It was significant to investors that audits of foreign companies trading on U.S. exchanges be issued by an international accounting firm, as opposed to a local foreign firm and the Complaint charges that International used its name and marketed itself accordingly. Cpt. ¶¶ 194, 265-272 (See Hansen Decl. Ex. 1; audit reports on U.S. traded companies signed by BDO International; Hansen Decl. Ex. 2, other audit reports signed in the name of local accounting firms.) While characterizing itself on its website and in its annual reports as a "leading global firm" providing accounting and auditing services, BDO International B.V. now claims to be a mere administrative functionary with no connections to any of the International member firms in respect to audits conducted under the "BDO International" name.
As noted by Judge Haight when confronted by a similar "now you see me now you don't" argument: either defendants are engaged in a global fraud by producing promotional materials that are a "pack of lies," or defendants are present in New York as part of a "single, closely intertwined network." Defendants "cannot have it both ways." Koehler v. Bank of Bermuda, Ltd., M18-302, Judgment No. 931745, 1994 WL 48825, at *5 (S.D.N.Y. Feb. 16, 1994).
I. FACTS A. Background Of The Action
This certified class action is brought to recover damages suffered by persons who purchased ACLN common stock during the Class Period as a result of an alleged fraud perpetrated on the investing public. On December 21, 2001, a news article appeared that contradicted the Company's prior SEC filings by revealing that ACLN did not own the shipping vessel, Sea Atef, which it had recognized as a major asset, and detailed numerous inconsistencies, inadequate disclosures and discrepancies in ACLN's public statements, including its filings with the SEC, with regard to, among other things, the Company's revenues, purported ownership of the Sea Atef, and its selling, general and administrative expenses. Cpt. ¶ 153. On this report, the price of ACLN shares fell dramatically — a one-day drop of 63%. Cpt. ¶ 158. The SEC began an investigation (Cpt. ¶¶ 160-161) which culminated in the halting of trading in ACLN stock on March 18, 2002, and its subsequent de-listing (Cpt. ¶¶ 163, 169). Following these events, ACLN's stock price declined further. Cpt. ¶ 173. The accounting irregularities at ACLN called into question not just the amounts reflected in the financial statements but the very existence of assets recognized. Cpt. ¶ 167.B. International's Statements
"Clean" audit reports on ACLN's financial statements for its fiscal years ended December 31, 1999 and 2000, respectively, were included in ACLN's Forms 20-F for 1999 and 2000 filed with the SEC. Each of these audit reports was signed "BDO International." Those reports stated:
The significance of International's audit reports to investors in this country is beyond question. See U.S. v. Arthur Young Co., 465 U.S. 805, 819 n. 15 (198 4).
We conducted our audits in accordance with generally accepted auditing standards in the United States and Cyprus. . . .
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects the financial position of ACLN Limited . . . in conformity with accounting standard generally accepted in the United States.
The Complaint charges that the audit reports were materially false and misleading and that International knew or, but for its recklessness, would have known that they were materially false and misleading. Cpt. ¶¶ 58-175, 197-202, 234-263, 274, 284, 313.
International stressed the quality of its global network and the stringent standards and quality controls imposed and implemented by International on each member firm and the quality of its member firms. Cpt. ¶¶ 265, 268-273. These representations are claimed to be false and misleading. Cpt. ¶¶ 199-202, 234-256, 274-282. The auditors in Cyprus, who worked on the ACLN engagement, were not qualified; they had no training or proficiency in the application of U.S. GAAP or U.S. GAAS. Cpt. ¶¶ 234-246, 274.
C. International's Statements Or Deceptive Practices
International is alleged to have issued false audit reports on ACLN's financial statements and made other misrepresentations. According to its Annual Reports, International is one large global firm that provides a full range of accounting and auditing services and operates as a single entity with uniform and stringent quality controls strictly imposed on each of its member firms. Cpt. ¶¶ 268-272, 277, Hansen Decl. Exs. 5-7. As noted, BDO International B.V. presents itself to the world as "BDO International" (Cpt. ¶ 194) and has its principal offices in Brussels, Belgium. International represents to the public that its member firms are its representatives. Cpt. ¶ 266. It has a significant presence in the United States through its representative practice, conducted by its member firm BDO Seidman, which has 35 offices throughout the country. Cpt. ¶ 267. International is charged with intentionally creating and fostered the belief in the investing public, including the Class herein, that the audit reports issued by International should be relied upon because they were backed by the expertise of its global network of member firms — expertise that was ensured by the strict quality controls imposed and implemented by International. Additionally, ACLN's listing application to the NYSE stated that "[t]he Company has engaged BDO International as its independent public accountants since 1996." ACLN's filings with the SEC, that were reviewed by International through its representatives at BDO Seidman and BDO Minas Ioannou, stated that ACLN's auditors were BDO International. ACLN stated that "[t]he financial information set forth below for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 has been derived from our financial statements, which have been audited by BDO International, independent auditors" and announced shareholder approval at the ACLN annual meeting of "the re-appointment of BDO International as the Company's independent auditors for the 2001 fiscal year." Hansen Decl. Ex. 9 (Form 20-F) Ex. 10 (Form 6-K).
International represented that, through its regional offices, it offers a full range of professional auditing, accounting, tax, financial and management advisory services, and ranks number six on the list of the world's largest multinational accounting and consulting firms. International represented that it maintains in excess of 590 offices in 99 countries worldwide with its principal offices located in Brussels, Belgium. Cpt. ¶¶ 29, 194. International began in 1963 when firms from the United Kingdom, Germany, the Netherlands, USA and Canada joined together under the name Binder Seidman International Group. In 1988, as the firm continued to expand globally, the umbrella organization International was formed, to enable all of its regional offices to operate as a single global partnership or joint venture. Cpt. ¶ 194. Under the structure of International since 1988, member firms were required to identify themselves as "BDO International." Cpt. ¶ 277.
International underscores its global unity by reporting revenues on a worldwide basis. Cpt. ¶ 265. Thus, for example, its Annual Reports note the year-over-year increase in worldwide fees. International's Annual Report for 1999 at 4; International's Annual Report for 2000 at 8. As of September 30, 2001, International reported total income for the year of EUR 2.413 billion (or US $2.203 billion), almost 50% of which came from the Americas. Cpt. ¶ 265, quoting BDO International's Annual Report for 2000 at 4. Additionally, contrary to its assertion on this motion that International performs no audit or accounting services (BDOI Mem. at 5, van Elten Decl. ¶ 4), International acknowledges that "[a]udit and accounting accounted for 58% of the total fees. . . ." Cpt. ¶ 265, International's Annual Report for 2001 at 5.
Under the heading "Professional Excellence" International represents on its website that:
We take great care to ensure that every one of our member firms embodies BDO's methodology, and it is significant that we have only one member firm in each of the 98 countries in which we currently operate. The stringent conditions with which each member firm has to comply to be part of the BDO network are paramount. They not only guarantee that our high standards are met, but also enable each member firm to share information and expertise across the world.
Training plays an important role in the continuous professional development of our partners and staff but, equally, we are aware that technical excellence is, today, no longer enough. We therefore select people who, in addition to their substantial professional knowledge, also have proven business abilities, and can analyze, interpret and advise on both local and international concerns.
Publication on the internet ensures widespread circulation and may act as sufficient notice of matters to the public. See, e.g., Laborers' Pension Fund v. Blackmore Sewer Constr., Inc., 298 F.3d 60 0, 607 (11th Cir. 2002).
Additionally, International refers to clients serviced by its member firms as "our clients," not clients of the member firm. Thus, for example, International's "Regional Profile NAFTA," which mentions the work of its U.S. member BDO Seidman, refers to seminars held in the U.S. and states:
These seminars helped to expose our clients to the many professional services that BDO can offer on either side of the border. . . . As BDO clients venture into NAFTA and other new markets, we will continue to devote our attention and resources to helping them capitalize on the many business opportunities available. . . . At BDO, we value all of our client relationships.
International specifically stressed the importance of its local offices to the provision of worldwide services in its global network. International held itself out as a highly skilled international accounting firm that benefits its clients by the interaction between its local offices throughout its global network and the synergies afforded by this structure. In describing its services to clients, International stressed the link between the local and global nature of its services. International stressed the uniform and stringent controls it imposed on member firms as a basis for the confidence and reliance that should be placed on an International audit. Cpt. ¶¶ 268-72. Contrary to the assertion that "Member Firms . . . insure their own work" (van Elten Decl. ¶ 8), International repeatedly represented that "the organization's structure ensures strict quality control . . ." Cpt. ¶ 268, quoting International's 2001 Annual Report at 2; Cpt. ¶ 270, quoting International's Annual Reports.
Mr. van Elten's representations that BDO International B.V. is not involved in the activities of its Member Firms or the quality of their work (van Elten Decl. ¶¶ 7-9), are explicitly contradicted by International's Annual Reports. Indeed, these reports state that the responsibility for implementing International's quality control and training programs rests squarely in the International Office in Brussels and, even more particularly, with its Chief Executive Officer and its International Secretary, Paul van Elten. Thus, International's Annual Report for 1999 states:
• "Based in the International Office in Brussels, Chief Executive Officer Cecil Fleming and International Secretary Paul van Elten are responsible for BDO International's daily operations, and for policy implementation. This includes overseeing legal and administrative matters, implementing international quality control and training programmes, and giving ad hoc project assistance where necessary."
Cpt. ¶ 272, quoting from International's 1999 Annual Report at 7. Similarly, International's Annual Report for 2000 states:
• "Cecil Fleming and Paul van Elten, based in the International Office in Brussels, Chief Executive Officer and International Secretary respectively of BDO International, are based in the International Office in Brussels. They are responsible for BDO's daily operations internationally, and for policy implementation. This includes overseeing all legal and administrative matters relating to the network's 96 member countries, and implementing international quality control and training programmes."
Cpt. ¶ 272, quoting from International's 2000 Annual Report at 11, Hansen Decl. Ex. 6.
The allegedly false audit reports on ACLN's financial statements for fiscal years ended December 31, 1999 and 2000 were issued by International. They are signed "BDO International." Cpt. ¶ 173. International's attempt to disassociate itself from its audit reports by denying that it is an accounting firm and claiming that it has no involvement whatsoever in the audit or accounting work performed by its regional offices is belied by its own words, including representations that investors could rely on its audits because of the controls International had in place. Cpt. ¶ 275.
Contrary to International's assertion on this motion that "BDO B.V. has not and does not certify audits," it appears to routinely do just that. The signature of "BDO International" on the ACLN audit reports was not an isolated event. International regularly signs audit reports on behalf of U.S. publicly-reporting companies, which are disseminated throughout the U.S. In this case International signed the two audit reports on ACLN's financial statements alleged by Plaintiffs to be false and misleading. Cpt. ¶ 193. To the extent that International may afford its clients the option of retaining only a local office, that fact is clearly reflected on the face of the audit report. In those instances, the audits are not signed by "BDO International" but by the local office. See Hansen Decl. Ex. 2.
International, by and through its member firms in New York and Cyprus, actually performed the auditing and accounting functions for ACLN. Cpt. ¶¶ 196-246. To perform these functions on behalf of defendant ACLN, the BDO member firms met with ACLN officers and directors in the United States, participated in conference calls in New York, and used their offices in New York to make phone calls, analyze data and perform auditing functions. Cpt. ¶¶ 208, 210-213, 215-246. These services lasted throughout the Class Period.
Contrary to the representation in International's audit reports that ACLN's financial statements were fairly presented in conformity with GAAP, plaintiffs contend that they were not; and contrary to the representation that International conducted its audits in accordance with GAAS, plaintiffs contend it did not.
Defendant argues that this Court does not have the power to exercise jurisdiction over it because it is nothing more than a "small Dutch company" that has no contact with the United States. However, as stated by International's Chief Executive Officers, the business of International (and necessarily BDO International B.V.), is conducted in each country where International is represented. "The Chief Executive Officer coordinates the network, assists and advises the members of the network, leads the administration and control of the network, searches for opportunities on new markets and manages the reports by members and the annual report." BDO Belgium Newsletter June 2002 at 1, quoting Frans Samyn, International's Chief Executive Officer. Indeed, his predecessor, Cecil Fleming, International's Chief Executive Officer during the Class Period, stated that "it was a very tiring job" because "I had to travel a lot to visit all the members and help them." Id. at 2 (emphasis added).
Additionally, according to International's Chief Executive Officer, implementation of International's purported "quality controls" injects International into the daily operations of its member firms and International exercises the power to control those operations. CEO Samyn was quoted as saying, with respect to representations of "confidentiality" and "strict secrecy" on BDO Vanatu's website (an un-cooperative jurisdiction in the effort to stem the erosion of national tax bases by selling secret offshore bank accounts), BDO Vanatu, like any other firm in the BDO network was undergoing strict quality assurance reviews. "If such review would indicate that BDO Vanatu is not complying with the (BDO) manuals or would otherwise offer services which are incompatible with the core services offered by BDO worldwide, it will be obliged to discontinue such activities immediately." AccountancyAge.com, March 19, 2003.
International's council is made up of representatives from every country in which it is represented and the United States is one of the ten member International Policy Board that meets quarterly each year at different member firm's offices to discuss and determine International's overall strategy, set policy matters and carry out the day-to-day management of International. In addition to having a member on International's policy board (Denis Field in 1999 and Terrence Kelly in 2000), Catherine Ettinger, manager of BDO Seidman eServices, served as the U.S. member of the BDO International Intranet Committee, BDO Seidman also provided the secretary of the BDO International Accounting and Auditing Committee and the head of the BDO International Transfer Pricing Taskforce in 1999. International also regularly holds meeting in the United States. Thus, for example, the general meeting of partners was held in Chicago in September 2002.
As Messrs. Samyn and Fleming acknowledged, the "business" of International's office in Brussels, Belgium was and is essential and integral to the business of the International member firms and International regularly conducted its business at and through the offices of its members firms, including those of BDO Seidman in the United States.
In addition to conducting its regular business activities in the United States, International continuously and systematically licenses the use of its name and logo to its member firms, including BDO Seidman, which it knew would be used on audit reports. Cpt. ¶ 280. International benefitted monetarily from this practice. Cpt. ¶ 281. International apparently knows that audit reports prepared by member firms will be identified as "BDO International" audits. Indeed, International requires its member firms to use the BDO International corporate identity and logo. Cpt. ¶ 281. Finally, International, by and through its member firm BDO Seidman, functioned as part of the ACLN engagement team in the United States. Cpt. ¶¶ 205-246.
II. DISCUSSION A. Has Personal Jurisdiction been Sufficiently Alleged? 1. Standard of Review under Rule 12(b)(2)
"A motion to dismiss under Rule 12 must be denied `unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" In re Sumitomo Copper Litig., 120 F. Supp.2d 328, 334 (S.D.N.Y. 2000) (internal citation omitted). Where, as here, jurisdiction is challenged prior to discovery, plaintiffs may defeat a motion to dismiss by "pleading in good faith . . . legally sufficient allegations of jurisdiction." Ball v. Metallurgie Hoboken-Overpelt, 902 F.2d 194 (2d Cir. 1990) (internal citation omitted). Until an evidentiary hearing is held, plaintiffs need make only a prima facie showing by their pleadings and affidavits that jurisdiction exists. See CutCo Industries, Inc. v. Naughton, 806 F.2d 361, 365 (2d Cir. 1986). Such pleadings and affidavits submitted by plaintiffs are construed in the light most favorable to plaintiff and all doubts are resolved in its favor. See id. (citing Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57 (2d Cir. 1985)). In considering a jurisdictional motion, the Court may consider evidence outside of the pleadings in reaching a decision without converting the proceeding into one for summary judgment under Rule 56. See Am. Prop. Consultants, Ltd. v. Walden Lisle Assoc., L.P., No. 95 Civ. 329, 1997 WL 394617, at *4 (S.D.N.Y. July 14, 1997). The Court notes that "legal conclusions couched as factual allegations are not facts and cannot substitute as facts," Cornell v. Assicurazioni Generali S.p.A., No. 97 Civ. 2262, 2000 WL 1099844, at *1 (S.D.N.Y. Aug. 7, 2000), and that eventually, of course, the plaintiff must establish jurisdiction by a preponderance of the evidence, either at a pretrial evidentiary hearing or at trial. Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981).
2. Specific Jurisdiction
Minimum contacts with the United States can be established under the doctrine of "specific jurisdiction" or "general jurisdiction." Specific jurisdiction may be exercised where an alleged injury arises out of or relates to actions by the defendant that are purposely directed toward forum residents, and where jurisdiction would not otherwise offend "fair play and substantial justice." See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 471-78 (1985).
Plaintiffs have based jurisdiction on, among other provisions, Section 27 of the Exchange Act, 15 U.S.C. § 78. Courts have held that, in cases where the court's personal jurisdiction is invoked under § 78aa (or other federal statutes authorizing nationwide service of process) the relevant forum is the entire United States; in other words, the proper inquiry is whether the defendant has minimum contacts with the United States. See Pro-Fac Co-op., Inc. v. Alpha Nursery, Inc., 205 F. Supp.2d 90, 99-100 (W.D.N.Y. 2002) (citing United States S.E.C. v. Carrillo, 115 F.3d 1540, 1544 (11th Cir. 1997); Application to Enforce Administrative Subpoenas Duces Tecum of S.E.C. v. Knowles, 87 F.3d 413, 417 (10th Cir. 1996) ("The question then before this court is whether Knowles has sufficient minimum contacts with the United States to enable the district court to exercise personal jurisdiction over him consistent with the Due Process Clause of the Fifth Amendment"); Busch v. Buchman, Buchman O'Brien, Law Firm, 11 F.3d 1255, 1258 (5th Cir. 1994); United Liberty Life Insurance Co. v. Ryan, 985 F.2d 1320, 1330 (6th Cir. 1993) (national-service-of-process provision of § 78aa "confers personal jurisdiction in any federal district court over any defendant with minimum contacts to the United States")).
a. International's Audit Opinion Letters — Injury and Purposeful Direction
Personal jurisdiction may be exercised over an out-of-state defendant who "must know, or have good reason to know, that his conduct will have effects in the state seeking to assert jurisdiction over him." Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1341 (2d Cir. 1972). Under a nationwide contacts analysis, this Court may assert jurisdiction over International if it knew, or had good reason to know, that its actions would have an effect in the United States.
In its defense, BDO International B.V. asserts that it is functionally and legally separate from its Member Firms, and that it is merely the licensor of the "BDO International" name, the "BDO" acronym, BDO Software, and BDO Technical Manuals to accounting firms around the world. van Elton Decl. ¶¶ 6-7. BDO International B.V. claims it has never conducted any accounting, auditing, tax, financial management advice or other financial service for any company. van Elton Decl. ¶ 10. Defendant's motion to dismiss states that as a separate entity, BDO International B.V. has no contacts with the United States and did no work for ACLN which would create a direct and foreseeable injury in the United States. BDOI Mem. at 14-15.
At this stage, however, it appears that Plaintiffs have pled in good faith sufficient allegations that BDO International B.V. and BDO International are the same entity for jurisdictional purposes. Plaintiffs assert that BDO International B.V. is the corporate entity through which defendant BDO International operates, Cpt. ¶ 36, and that BDO International B.V. presents itself to the world as BDO International. Cpt. ¶ 194.
Plaintiffs have supported this assertion by references to the BDO website and BDO annual reports, among other sources. The Court notes in particular that BDO's annual reports have used "BDO International B.V." and "BDO International" interchangeably in their "Acknowledgments" section. In the 2000 and 2001 Annual Reports Acknowledgments section, "BDO International," located at Boulevard de la Woluwe 60, 1200 Brussels, Belgium (+32 2 778 01 30) is substituted for "BDO International B.V." (with the same address and telephone number) from the 1999 Annual Report Acknowledgments section. Hansen Decl. Ex. 5-7. On the BDO International webpage, "About Us" leads to a reference to "BDO" as "the fifth largest multinational accounting and advisory organisation in the world, and number 1 in its chosen `middle market' niche." See http://www.bdo-international.com. Under "Contact Us" on this webpage there is a listing for "BDO International B.V.," at the same address and telephone given for "BDO International" and "BDO International B.V." in the Annual Reports. See id. The Court also notes the assertion that, when trying to serve BDO International under the Hague Convention, Plaintiffs' counsel was effectively informed that BDO International was merely a name, and that the actual corporate entity was BDO International B.V. Transcript of Hearing on Motion, May 6, 2003, p. 18.
Considering the allegations in the complaint and the supporting material in the light most favorable to the Plaintiffs, and resolving all doubts in their favor, it appears that Plaintiffs have entered a pleading in good faith which establishes legally sufficient allegations of jurisdiction at this stage. Plaintiffs have made the factual allegation that BDO International B.V. is the corporate entity through which BDO International operates. Plaintiffs have made the factual allegation that International, by and through its member firms, issued the unqualified audit opinion letters included in ACLN's 1999 and 2000 financial statements. Cpt. ¶ 254. Plaintiffs have further alleged that International knew that these audit opinions would be included in ACLN's Form 20-F filings with the SEC in both 2000 and 1999. Cpt. ¶¶ 197, 198, 261. Based on the allegations in the complaint and supporting material, Plaintiffs have made a prima facie showing that International engaged in a course of conduct with the knowledge that it would affect American investors in the United States. The Court thus has a basis upon which to exert specific jurisdiction over the Defendant at this stage of the proceedings.
b. Defendant Has Not Shown that Jurisdiction Would be Unreasonable
The Court must next consider whether the assertion of personal jurisdiction comports with "traditional notions of fair play and substantial justice," i.e., whether it is reasonable under the circumstances of the particular case. See Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 568 (2d Cir. 1996).
A court's determination of "reasonable" depends on (1) the burden on the defendant; (2) the interests of the forum state; (3) the plaintiffs' interest in obtaining convenient and effective relief; and (4) judicial efficiency. See Sumitomo, 120 F. Supp.2d at 343. While it is true that International's principal offices appear to be in Europe, litigation in New York City would not represent any great inconvenience to the International. Although International maintains otherwise, Plaintiffs have alleged that International controls a far-flung business enterprise with access to enormous resources and a physical presence through a Member Firm located in the forum state. Plaintiffs also point out that New York City, where the trial would be held, is a major world capital which offers central location, easy access, and extensive facilities of all kinds. See Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 99 (2d Cir. 2000). Furthermore, "New York and the United States have an interest in protecting their residents from overseas fraud and ensuring the integrity of the commodities markets." Sumitomo at 343-44 (quoting ACLI Int'l Commodity Serv., Inc. v. Banque Populaire Suisse, 652 F. Supp. 1289, 1299 (S.D.N.Y. 1987)). The Court thus concludes that the inconvenience to International involved in litigating in New York City would not be so great that the Due Process Clause would preclude this Court from exercising its jurisdiction.
B. HAS THE COMPLAINT BEEN PLEAD WITH PARTICULARITY? 1. Standard of Review under Rule 12(b)(6), Rule 9(b) and the PSLRA
On a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court may dismiss the Complaint "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King Spaulding, 467 U.S. 69, 73 (1984) (citation omitted); see also Hollin v. Scholastic Corp. (In re Scholastic Corp. Sec. Litig.), 252 F.3d 63, 69 (2d Cir. 2001). "The task of the court in ruling on a Rule 12(b)(6) motion is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (internal quotations omitted). Thus, to properly rule on such a motion, the court must accept as true all material facts alleged in the complaint and draw all reasonable inferences in the nonmovant's favor. See Harris v. City of N.Y., 186 F.3d 243, 247 (2d Cir. 1999). The Complaint must be read "as a whole" in determining whether it states a claim for which relief may be granted. See Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562 (2d Cir. 1986); Scholastic, Inc. v. Stouffer, 124 F. Supp.2d 836, 841 (S.D.N.Y. 2000). Motions to dismiss are generally viewed with disfavor. See Walsh v. McGee, 918 F. Supp. 107 (S.D.N.Y. 1996).
Rule 9(b) sets forth additional pleading requirements with respect to allegations of fraud. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Under Rule 9(b), "[m]alice, intent, knowledge and other condition of mind of a person may be averred generally." However, the PSLRA heightened that Rule's requirement for pleading scienter. See 15 U.S.C. § 78u-4(b)(3)(A); see also Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999). As a result, in securities fraud actions, scienter may not be averred generally. Rather, plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Press, 166 F.3d at 538 (quoting 331 15 U.S.C. § 78u-4(b)(3)(A)); see also Chill v. General Elec. Co., 101 F.3d 263, 268-69 (2d Cir. 1996).
2. RULE 10(b) and 10b-5
Defendant contends that Plaintiffs have failed to allege — with the requisite particularity required by the PSLRA and Fed.R.Civ.P. 9(b) — that it participated in any fraudulent act or had the required level of scienter.
a. Claims Against Multiple Defendants
Courts require that "a plaintiff . . . set forth separately the acts complained of by each defendant." Double Alpha, Inc. v. Mako Partners, L.P., No. 99 Civ. 11541, 2000 WL 1036034, at *3 (S.D.N.Y. July 27, 2000). Defendant claims that the complaint does not make specific allegations against BDO International B.V. and thus fails to meet the requirements of Rule 9(b).
But, as noted above, Plaintiffs have made a prima facie showing that BDO International B.V. and BDO International are the same entity, and have stated with specificity the roles of each of the BDO entities in the fraud. Cpt. ¶¶ 193-281.
b. Culpable Intent on the part of Defendant
Defendant contends that Plaintiffs have failed to allege any culpable intent on the part of BDO International B.V. with the particularity required by the PSLRA and Rule 9(b). Specifically, Defendant contends that vague and conclusory assertions of GAAP or GAAS violations without more, cannot ground a valid claim for securities fraud. BDOI Mem. at 24. Defendant cites Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994) to support this proposition. In Shields, the Court held that while "[t]he pleading strongly suggests that the defendants should have been more skeptical, . . . nothing alleged indicates that management was promoting a fraud." Id. Important to this holding, however, is the Court's earlier statement that "[n]owhere in her Complaint does Shields adduce the kind of circumstantial evidence that would indicate conscious fraudulent behavior or recklessness." Id.
Allegations that multiple red-flags were ignored in performing the audits can reasonably support an inference of intent. See In re Health Management, Inc. Securities Litigation, 970 F. Supp. 192, 203 (E.D.N.Y. 1997); In re Leslie Fay Companies Inc., 871 F. Supp. 686, 699 (S.D.N.Y. 1995), modified on other grounds, 918 F. Supp. 749 (1996). And, unlike in Cromer Finance Ltd. v. Berger, 137 F. Supp.2d 452, 493-94 (S.D.N.Y. 2001) — where claims against Deloitte Touche Tohmatsu were dismissed because "[t]he Complaint does not allege that DTT was even aware of the reports, much less aware that its name and logo were included on the audit reports." — it has been specifically alleged that International was aware that its name appeared on the audit reports filed with ACLN's 1999 and 2000 Form F-20. Cpt. ¶¶ 197, 198, 277.
Plaintiffs contend that multiple violations of the GAAS general standards, standards of fieldwork, and standards of reporting were committed. The complaint alleges that International, and thus BDO International B.V., (1) failed to adequately plan and supervise the work of its staff; (2) failed to establish and carry out procedures reasonably designed to search for and detect the existence of material misstatements caused by error or fraud; (3) failed to be independent because of its dual role as the Company's outside auditors and internal accountants; (4) issued an opinion where an opinion on financial statements taken as a whole could not be expressed without stating the reasons therefore; (5) failed to exercise required professional skepticism in connection with its audits; (6) failed to exercise due professional care in the performance of the audit and the preparation of the report; (7) failed to obtain all corroborating information necessary to support the financial statements being audited; (8) failed to establish and perform a confirmation process with third parties to verify information utilized in the audit; (9) substituted client representations for audit procedures necessary to form a reasonable basis as to the opinion being given on financial statements; (10) processed facts that were in direct conflict with the statements made by the Company in its 20-F filings; (11) failed to verify that ACLN did not own the Sea Atef and was not entitled to take certain write-offs associated with the ship; (12) failed to verify that the Company's public statements about the cash it held were greatly exaggerated; (13) failed to meet with the members of the Audit Committee which would have revealed that defendant Savva was not an attorney and that defendant Brock was a company insider because he also served as the Company's attorney; (14) failed to discover that the Company made inaccurate statements about the numbers of shares held by insiders; (15) failed to discover that the Company's net revenues had been overstated; (16) failed to discover that the Company was violating its own stated policy regarding recognition of revenue; (17) failed to discover that the Company had not shipped the number of vehicles it had claimed to have shipped; (18) failed to discover that the Company had not disclosed self dealing transactions; (19) failed to discover that "per vehicle" payments were grossly excessive, commercially unreasonable, and without consideration; and (20) falsely reported that it had performed its audits during the Class Period in accordance with U.S. GAAS. Cpt. ¶¶ 247-55, 263-64, 284(a), (e), (r). These purported violations are sufficient to support the inference of the requisite scienter. Plaintiffs have pled this element with the particularity required under the PSLRA.
3. Rule 20(a)
"Control over a primary violator may be established by showing that the defendant possessed `the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.'" S.E.C. v. First Jersey Secs., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996) (quoting 17 C.F.R. § 240.12b-2). At the motion to dismiss stage, a plaintiff need only "plead facts supporting a reasonable inference of control." In re Independent Energy Holdings PLC Sec. Litig., 154 F. Supp.2d 741, 770 (S.D.N.Y. 2001), abrogated on other grounds by In re Initial Public Sec. Litig., 241 F. Supp.2d 281 (S.D.N.Y. 2003).
Plaintiffs point to statements in the annual reports to show that "International" controls its member firms. Specific references are made to International's statements that the member firms are its "representative practice[s]", that the organization's structure "ensures strict quality control and encourages the sharing of skills and ideas", and that the "stringent conditions which each member firm has to comply to be part of the BDO network are paramount." Comp. ¶¶ 268-72. At this stage, it appears that plaintiffs have pled facts supporting a reasonable inference of control. Thus, since plaintiffs have adequately alleged a primary violation by a BDO Member Firm, a reasonable inference of control over the entity involved, with culpable participantion in the fraud (by willful blindness to its Member Firm's incompetence and consent to inclusion of the audit reports in ACLN's 1999 and 2000 Form 20-F statements), the Section 20(a) violation has been adequately pled. See SEC v. First Jersey's Sec., Inc., 101 F.3d at 1472-73.
CONCLUSION
Plaintiffs have made the necessary prima facie showing by their pleadings and affidavits to allow this Court to exert personal jurisdiction over International at this stage of the proceedings. Plaintiffs have sufficiently alleged that BDO International B.V. is the corporate entity through which BDO International operates and have shown injury, purposeful direction, and minimum contacts by International with the United States. Plaintiffs have shown that assertion of this Court's jurisdiction would comport with traditional notions of fair play and substantial justice.
Plaintiffs have also sufficiently pled securities fraud under Rule 9(b) and the PSLRA. The material facts alleged in the complaint and reasonable inferences drawn therefrom lead to the conclusion that BDO International B.V. is the corporate entity through which BDO International operates, and that it was a knowing signatory to the audit reports filed with the SEC. The failure of Defendant to recognize or follow-up on improprieties as obligated under GAAS standards creates a sufficient inference of fraudulent conduct or recklessness for stating a claim under Rule 10(b) and 10b-5. Plaintiffs have also sufficiently pled control person liability under Rule 20(a) by alleging that Defendant controlled a primary violator and was a culpable participant in the fraud.
Defendant's motion to dismiss is denied.
SO ORDERED.