$ 2 million in licensing fees from an overseas licensee without any payments having been made on the licensing agreement or any assurances that the licensee actually could pay the fees. The amount was later reduced when Wellcare revised its 1995 financial statements.
A March 16, 1996 Barron's article first publicized these transactions. The price of Wellcare stock immediately fell 12%. Within two weeks, despite an initial rebuttal to the article, Wellcare announced that it believed "a restatement will be required."
Wellcare then submitted a Form 12b-25 Notification of Late Filing with the SEC seeking two weeks additional time for the completion of an audit to permit further review and investigation as a result of the Barron's article. The two weeks became two months.
Ullman was removed as Chairman and Chief Executive Officer, NASDAQ notified Wellcare that it was delisting the company's common stock, effective May 13, 1996, and the price of Wellcare stock continued to fall.
On May 14, 1996, Wellcare restated its 1994 and 1995 financial statements. The results for 1994 were: earnings per share reduced by nearly 50%; medical loss ratio increased from 77.8% to 81.7%, which is alleged to be significant; and the company admitted that it improperly recorded as deficit payments $ 4.7 million in payments made from physician groups via bank loans guaranteed by Ullman.
The results for 1995 were: earnings per share reduced by over 75%; the company admitted that it had not received any fees from the sale of the Bienestar trademark; and the company stated that it would show a reserve for the $ 5.1 million note from the sale of Wellcare Medical Management by reason of its uncollectibility.
B. Defendant Deloitte & Touche
The plaintiffs also allege a § 10(b) claim against their auditors, Deloitte & Touche. The basis for this claim is alleged violations of generally accepted auditing standards ("GAAS"), and its allegedly reckless conduct in relation to the accounting of the 1994 transactions and the Mid-Hudson acquisition, described above. It is the contention of the plaintiffs that Deloitte & Touche was aware of facts that should have prompted it to conduct further investigation, and/or that Deloitte & Touche faced enough "red flags" to put it on notice of improper accounting practices by Wellcare. Deloitte & Touche claim that, at best, the plaintiffs have alleged a claim for negligence.
The Court now turns to the issues presented.
A. Standard for a Motion to Dismiss
On a dismissal motion for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), the general rule is that the allegations in a plaintiff's Amended Complaint are deemed to be true and must be liberally construed in the light most favorable to the plaintiff. Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 85 L. Ed. 2d 144, 105 S. Ct. 1845 (1985). A Complaint should not be dismissed unless it appears beyond a reasonable doubt that the plaintiff cannot in any way establish a set of facts to sustain a claim which would permit relief. Hughes v. Rowe, 449 U.S. 5, 10, 66 L. Ed. 2d 163, 101 S. Ct. 173 (1980); Bass v. Jackson, 790 F.2d 260, 262 (2d Cir. 1986).
When fraud is asserted, as in the instant case, the Court also must view the Amended Complaint in light of Fed. R. Civ. P. 9(b), which requires that "the circumstances constituting fraud ... be stated with particularity." Fed. R. Civ. P. 9(b). Securities fraud allegations are subject to the pleading requirements of Rule 9(b). See Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993), citing, Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989).
To serve the purposes of Rule 9(b), this Circuit requires, inter alia, that the plaintiffs allege facts that give rise to a strong inference of fraudulent intent. See Mills, 12 F.3d at 1176. The requisite "strong inference" of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. See In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 268-69 (2d Cir. 1993).
It is with these legal standards in mind that the Court turns to the issues presented.
B. Sufficiency of Amended Complaint as to Scienter
The plaintiffs allege claims pursuant to Sections 10(b), or more specifically Rule 10b-5 of the regulations promulgated thereunder, and 20(a) of the Securities Exchange Act. 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5, & 15 U.S.C. § 78t(a). 17 C.F.R. § 10b-5 states, in relevant part:
It shall be unlawful for any person, ... (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 statements made, in the light of the circumstances under which they were made, not misleading, or (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.