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IN RE PHILIP SERVICES CORP. SECURITIES LITIGATION

May 4, 1999

IN RE: PHILIP SERVICES CORPORATION SECURITIES LITIGATION. ROBERT W. HILLGER, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
PHILIP SERVICES CORPORATION, ALLEN FRACASSI, MARVIN BOUGHTON, AND ROBERT WAXMAN, DEFENDANTS.



The opinion of the court was delivered by: Mukasey, District Judge.

  OPINION AND ORDER

In this consolidated class action, plaintiffs sue Philip Services Corporation ("PSC"), several of its current and former officers and directors, 17 underwriters (the "Underwriter Defendants") and Deloitte & Touche ("Deloitte"), alleging violations of several federal securities laws. Defendants move to dismiss plaintiffs' Consolidated and Amended Class Action Complaint (the "complaint") on forum non conveniens grounds. In addition, defendants Deloitte, William Haynes and Robert Knauss move to dismiss for failure to state a claim. For the reasons stated below, defendants' motion to dismiss on forum non conveniens grounds is granted, and plaintiffs' complaint is dismissed. In light of this outcome, the motions to dismiss for failure to state a claim will not be treated.

I.

The following facts are relevant to this motion. PSC, a Canadian corporation, is "an integrated resource recovery and industrial services company, which provides metal recovery and processing services, by-products recovery and industrial services to major industry sectors throughout North America." (Compl. ¶ 48) The company's principal executive offices are in Ontario, Canada; its U.S. corporate headquarters are in Pittsburgh, Pennsylvania. (Id.) PSC's stock is traded on the New York Stock Exchange ("NYSE"), the Toronto Stock Exchange and the Montreal Stock Exchange, and, prior to April 30, 1996, was traded also on the NASDAQ market. (Id.)

Between 1992 and 1997, PSC sought to expand its revenue base, its range of services and its network of facilities throughout North America. (Id. ¶ 164) To the extent relevant here, this expansion effort took two forms. First, in 1997, PSC acquired two companies — Allwaste, Inc. ("Allwaste") and Serv-Tech, Inc. ("Serv-Tech") — in stock-for-stock deals worth a total of approximately $560 million. (Id. ¶ 165) Second, in November 1997, PSC completed two secondary public offerings, which together raised approximately $380 million. (Id. ¶¶ 1-2) One offering, which raised approximately $284 million, was made exclusively to U.S. investors, and was underwritten by 17 American securities firms, the Underwriter Defendants. (Selinger Aff. ¶¶ 6-11) The other offering, which raised approximately $94 million, was made only to investors outside the United States, and was underwritten by eight Canadian securities firms (the "Canadian Underwriters"). (Id. ¶¶ 8-10) In connection with the acquisitions of Allwaste and Serv-Tech and the U.S. public offering, PSC filed registration statements with the Securities and Exchange Commission ("SEC"). (Compl. ¶ 1)

On January 26, 1998, PSC announced that it would take "charges to earnings" for fiscal year 1997 of between $250 and $275 million. (Id. ¶¶ 7, 346) Over the next several months, this figure was raised to over $381 million, of which $125 million was reported to arise from overstated copper inventory and unrecorded copper-trading losses. (Id. ¶¶ 6-7, 9-11, 130, 346) In addition, PSC issued revised financial statements for fiscal years 1995, 1996 and 1997. (Id. ¶¶ 353, 357, 359) The revised statements disclosed that 1995 earnings had been overstated by approximately $22.5 million, or 690%, and that 1996 earnings had been overstated by $48.3 million. (Id. ¶¶ 3, 319) Thus, instead of posting a $28.4 million gain in 1996, as PSC had initially reported, the company recorded losses totaling approximately $20 million. (Id. ¶ 3) Due at least in part to these announcements, the share price of PSC stock dropped from $13 1/8 on January 16, 1998 to $2 9/16 in July 1998, a loss of approximately 80%. (Id. ¶ 13)

Unsurprisingly, PSC's announcements and the drop in its share price loosed a torrent of litigation. In Ontario, Joseph Menegon filed a class action (the "Menegon Class Action") on behalf of himself and all other "persons in Canada who held and/or purchased common shares of [PSC] between February 28, 1996 and April 23, 1998" against PSC, Deloitte and the Canadian Underwriters. (Serio Decl. ¶ 5 & Ex. D, ¶ 1) Additionally, PSC itself filed a lawsuit in Ontario against, inter alia, Robert Waxman — the former President of PSC's Metals Recovery Group and one of the defendants here — and Greg Madesker and Rik Barrese, metals traders who worked under Waxman, alleging that they perpetrated fraud at PSC. (Serio Decl. ¶ 6 & Ex. E)

In the United States, more than 20 class action lawsuits were commenced, in various jurisdictions, against some combination of the defendants here. These actions were transferred to this court by the Judicial Panel on Multidistrict Litigation and consolidated for pre-trial purposes. Thereafter, plaintiffs filed an amended complaint, alleging violations of (1) sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), 78t; (2) SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; and (3) sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77k, 77l(a)(2), 77o. (Compl. ¶ 15) Specifically, plaintiffs charge PSC with making materially false and misleading statements concerning its publicly reported revenues, earnings, assets and liabilities. (Id. ¶ 2) In addition, they seek to hold Deloitte liable in connection with its audits of PSC in 1995, 1996 and 1997 (id. ¶¶ 277-336), and to hold the Underwriter Defendants liable in connection with the November 1997 public offering. (Id. ¶¶ 337-45) Deloitte is a partnership organized under the laws of Ontario, and all its partners are Canadian citizens. (Matz Decl. ¶ 2) The 17 Underwriter Defendants are based in the United States, although seven of the firms conduct business in Canada also. (Selinger Aff. ¶¶ 9, 12 & n. 1)

II.

In making this inquiry, "[t]here is ordinarily a strong presumption in favor of the plaintiff's choice of forum." Murray v. British Broad. Corp., 81 F.3d 287, 290 (2d Cir. 1996) (citations omitted); accord Piper, 454 U.S. at 255, 102 S.Ct. 252. Thus, "dismissal usually is not appropriate unless `the balance of convenience tilts strongly in favor of trial in the foreign forum.'" Alfadda, 159 F.3d at 46 (quoting R. Maganlal & Co. v. M.G. Chem. Co., 942 F.2d 164, 167 (2d Cir. 1991)); accord Capital Currency Exch., N.V. v. National Westminster Bank PLC, 155 F.3d 603, 609 (2d Cir. 1998), cert. denied, No. 98-1308, 119 S.Ct. 1459, 143 L.Ed.2d 545 (Apr. 19, 1999). Nevertheless, where, as here, plaintiffs proceed in a representative capacity, their choice of forum is entitled to less weight. See Koster v. (American) Lumbermens Mut. Cas. Co., 330 U.S. 518, 524, 67 S.Ct. 828, 91 L.Ed. 1067 (1947); DeYoung v. Beddome, 707 F. Supp. 132, 138 (S.D.N.Y. 1989) (citing Koster, 330 U.S. at 523-27, 67 S.Ct. 828); see also Shulof v. Westinghouse Elec. Corp., 402 F. Supp. 1262, 1263 (S.D.N.Y. 1975) ("While it is axiomatic that a plaintiff's choice of forum is entitled to great consideration, the adage has little weight in stockholder class actions. . . ." (citing Koster, 330 U.S. at 524, 67 S.Ct. 828)). Such plaintiffs "have only a small direct interest in a large controversy in which there are many potential plaintiffs, usually in many potential jurisdictions." DeYoung, 707 F. Supp. at 138. Moreover, the plaintiffs who actually sue "do not claim to be witnesses to anything other than their ownership of an interest in the dispute and their desire, and that of their lawyers, to represent others similarly situated." Id.

A. The Adequacy of Ontario as an Alternative Forum

As noted, the first step in the forum non conveniens inquiry is to determine whether there is an adequate alternative forum for litigation of plaintiffs' claims. An alternative forum is adequate if "(1) the defendants are subject to service of process there; and (2) the forum permits `litigation of the subject matter of the dispute.'" Alfadda, 159 F.3d at 45 (quoting Piper, 454 U.S. at 254 n. 22, 102 S.Ct. 252); accord Capital Currency, 155 F.3d at 609. That the law of the foreign forum "differs from American law `should ordinarily not be given conclusive or even substantial weight' in assessing the adequacy of the forum." Alfadda, 159 F.3d at 45 (quoting Piper, 454 U.S. at 247, 102 S.Ct. 252). Nevertheless, in "rare circumstances," where the remedy offered by an alternative forum "is so clearly inadequate or unsatisfactory that it is no remedy at all," an unfavorable change in law that would result from suing in the alternative forum "may be given substantial weight." Piper, 454 U.S. at 254 & n. 22, 102 S.Ct. 252.

Defendants contend that Ontario, Canada is an adequate alternative forum. In response, plaintiffs argue that Ontario is inadequate because: (1) there is "substantial uncertainty" whether an Ontario court would exercise jurisdiction over all the Underwriter Defendants (Pl. Mem. at 14-15)*fn1; (2) Ontario would not recognize plaintiffs' claims against the Underwriter Defendants, which are based on a public offering within the United States to American investors (see id. at 15-16); (3) Ontario law "may" preclude plaintiffs from asserting "any claims for damages" against Deloitte, as PSC's auditor (id. at 16); and (4) Ontario lacks an "effective comparable class action remedy" for defrauded investors. (Id. at 2, 16-18) I will discuss each of plaintiffs' objections in turn.

Plaintiffs' first objection, that Ontario courts might not exercise jurisdiction over the Underwriter Defendants, is easily rejected. In joining the present motions to dismiss, the Underwriter Defendants have explicitly consented to Canadian jurisdiction. (See 12/23/98 Letter Br. from Brad S. Karp at 3) Thus, to the extent that plaintiffs' objection is premised on the assumption that Canadian courts would not have personal jurisdiction over the Underwriter Defendants, that objection is moot. See PT United Can Co. v. Crown Cork & Seal Co., 138 F.3d 65, 74-75 (2d Cir. 1998); cf. R. Maganlal & Co., 942 F.2d at 167 (stating that dismissal on forum non conveniens grounds can be conditioned on a defendant's consent to jurisdiction in the foreign forum); In re Union Carbide Corp. Gas Plant Disaster, 809 F.2d 195, 203-04 (2d Cir. 1987) (same).

Nevertheless, plaintiffs appear to argue also that Ontario courts might choose to abstain from exercising their jurisdiction over the Underwriter Defendants, on forum non conveniens grounds. (See Jack Decl. ¶¶ 9-10; 12/31/98 Letter Br. from Neil L. Selinger & Jeffrey C. Block at 2) However, in the event that this action is dismissed and a similar lawsuit is commenced in Ontario, neither plaintiffs nor defendants are likely to move — or to be in a position to move — the Ontario court to dismiss the new action on forum non conveniens grounds. (See La Forest Decl. ¶¶ 5-6) Moreover, even assuming the issue could be raised, it is hard to imagine that an Ontario court would dismiss the action in deference to the United States knowing that a U.S. District Court had already ruled that Ontario was the more appropriate and convenient forum. Cf. Schertenleib v. Traum, 589 F.2d 1156, 1163 (2d Cir. 1978) (stating that the "unlikely possibility that the plaintiff may ultimately have to return to the inconvenient forum is a factor to be weighed in deciding whether to dismiss, but this kind of improbability should not automatically preclude the use of forum non conveniens").

Next, plaintiffs argue that they might be precluded from bringing statutory claims against the Underwriter Defendants in Ontario because there is no equivalent under Ontario statutory law to sections 11 and 12(a)(2) of the Securities Act. This objection is without merit, for two reasons. First, contrary to plaintiffs' assertion, there is an Ontario statute analogous to sections 11 and 12(a)(2) of the Securities Act. As defendants note, section 130 of the Ontario Securities Act, R.S.O. 1990 c.S.5,*fn2 establishes a statutory remedy for investors who purchase securities in a public offering where the prospectus contains a material misrepresentation.*fn3 (See Reuter Decl. ¶ 7) In addition, as even plaintiffs' expert in Canadian law acknowledges, plaintiffs would have several common law causes of action against the Underwriter Defendants in an action brought in Ontario. (See Jack Decl. ¶¶ 21-22) To be sure, it is not apparent from ...


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