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SECURITIES AND EXCHANGE COMMISSION v. KPMG

United States District Court, Southern District of New York


April 9, 2003

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
KPMG, LLP, JOSEPH T. BOYLE, MICHAEL A. CONWAY, ANTHONY P. DOLANSKI, AND RONALD A. SAFRAN, DEFENDANTS.

The opinion of the court was delivered by: Denise Cote, United States District Judge

OPINION AND ORDER

Defendants have moved to transfer this action to the District of Connecticut, where related actions have been pending in Hartford for over two years. Plaintiff, the Securities and Exchange Commission ("SEC"), opposes the transfer. For the following reasons, the motion is denied.

Background

On January 29, 2003, the SEC filed a complaint in this district against KPMG LLP ("KPMG") and four current and former KPMG partners, Joseph T. Boyle, Michael A. Conway, Anthony P. Dolanski and Ronald A. Safran, alleging that through their fraudulent conduct these five defendants permitted Xerox Corporation ("Xerox") to manipulate its accounting practices in order to fill a $3 billion gap between its actual operating results and the results it reported to the investing public from 1997 to 2000 (the "Complaint"). According to the Complaint, after the alleged fraud was exposed and with the assistance of a new auditor, Xerox issued a $6.1 billion restatement of its equipment revenues and a $1.9 billion restatement of its pre-tax earnings for the years 1997 through 2000. The Complaint alleges four claims: (1) violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act; (2) violations of Section 10(a) of the Exchange Act; (3) aiding and abetting violations of Section 13(a) of the Exchange Act; and (4) aiding and abetting violations of Section 13(b) of the Exchange Act. It seeks permanent injunctions, disgorgement of KPMG's revenues from its Xerox activities for the years 1997 through 2000, and a civil penalty.

The Complaint includes the following information about the defendants. KPMG is described as a United States partnership that is a member firm of KPMG International, a Swiss association. The complaint asserts that KPMG maintains its headquarters in New York City, but during the events at issue in the Complaint had offices at Xerox's Stamford location.*fn1 Conway is a resident of Westport, Connecticut,*fn2 was the lead worldwide Xerox engagement partner for the 2000 audit, has been the National Managing Partner of KPMG's Department of Professional Practice since 1990, and is chairman of KPMG's Audit and Finance Committee. Boyle is a resident of New York City, was KPMG's relationship partner for the Xerox engagement in 1999 and 2000, and is a managing partner of the New York office of KPMG. Dolanski, who left KPMG in 1998, is a resident of Malvern, Pennsylvania, and was the lead engagement partner overseeing Xerox's audits from 1995 through 1997. Safran is a resident of Darien, Connecticut,*fn3 and was the lead engagement partner on the 1998 and 1999 Xerox audits.

Xerox is incorporated in New York and based in Stamford, Connecticut. On May 3, 2002, this Court enjoined Xerox from future violations of the securities laws pursuant to a complaint and consent to settlement executed by the SEC and Xerox that included payment of a civil penalty of $10 million. The May 3, 2002 Judgment required that a Special Committee of the Xerox Board retain a consultant to review Xerox's material internal accounting controls and policies. The consultant was to complete its review within 180 days after it had been appointed. The consultant was appointed on July 11, 2002. On December 20, 2002, the time for the completion of the review was extended by Stipulation and Court Order until February 6, 2003; on February 4, 2003, the completion date was extended until February 21, 2003 by Stipulation so ordered by this Court.

Related civil litigation is ongoing in the United States District Court in Hartford, Connecticut (the "Connecticut Actions"). The Connecticut Actions include a consolidated shareholder class action and a non-class shareholder action against KPMG and Xerox; derivative actions, including one against KPMG purportedly brought on behalf of Xerox; a separate consolidated shareholder class action against Xerox and its management concerning restructuring issues; and an ERISA class action against Xerox and its management. The first of these actions was filed in August 2000. None of the individual defendants in the instant lawsuit is a defendant in the Connecticut Actions.

Except for one action that bears little relationship to the Complaint, the Connecticut Actions remain in the initial motion stage. Only the consolidated class action against Xerox and its management over restructuring issues has survived a motion to dismiss and is in discovery. See In re Xerox Securities Litigation, 165 F. Supp.2d 208 (D.Conn. 2001). A motion to dismiss the consolidated class action naming KPMG is being briefed. On December 5, 2002, KPMG moved to dismiss the non-class shareholder action against it. KPMG filed a motion to dismiss the derivative action for lack of subject matter jurisdiction on August 16, 2002.

In support of their motion to transfer, the defendants state that KPMG's audit reports on Xerox's financial statements were issued from KPMG's Stamford office. The SEC adds the following facts. While it admits that KPMG's audit letters through 2000 are signed "Stamford, Connecticut," it asserts that KPMG has not audited Xerox since 2001 and that none of the individual defendants continues to work in Stamford. It asserts that audit work and management decisions important to this action occurred in New York City, Rochester, New York, Brazil, Europe, Japan and Canada, as well as Stamford. It points out that 500 boxes of documents have already been produced to the SEC in Washington, D.C. and that sworn investigative testimony has already been taken from thirty-nine witnesses. It adds that the two defendants who are residents of Connecticut, Conway and Safran, work in New York and Texas, respectively. Of the seven law firms that represent the defendants, four are from New York City, two are from Washington, D.C., and one is from Utah. The Commission has its second largest office in New York, but does not have an office in Connecticut.

Discussion

Section 1404 of Title 28 of the United States Code provides that "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." The district court has broad discretion to grant or deny motions to transfer and makes its determination based on "notions of convenience and fairness on a case-by-case basis." In re Cuyahoga Equip. Corp., 980 F.2d 110, 117 (2d Cir. 1992); Ocean Walk Mall LLC v. Kornitzer, No. 01 Civ. 213 (DLC), 2001 WL 640847, at *1 (S. D.N.Y. June 11, 2001); Hall v. South Orange, 89 F. Supp.2d 488, 493 (S.D.N.Y. 2000). The moving party bears the burden of establishing that transfer is warranted. Ocean Walk, 2001 WL 640847, at *1.

In deciding whether transfer is warranted, the Court must first determine whether the litigation could have properly been brought in the transferee court. Berman v. Informix Corp., 30 F. Supp.2d 653, 656 (S.D.N.Y. 1998). If the transferee court also has jurisdiction over the case, the Court then determines the level of deference to which the plaintiff's choice of forum is entitled and weighs that choice against several factors to determine whether transfer is appropriate. The factors to be considered include:

(1) the convenience of witnesses, (2) the convenience of the parties, (3) the location of relevant documents and the relative ease of access to sources of proof, (4) the locus of operative facts, (5) the availability of process to compel the attendance of unwilling witnesses, (6) the relative means of the parties, [and] (7) the forum's familiarity with the governing law. . . .
Id. at 657.

The SEC's choice of forum is entitled to that level of deference to which a plaintiff's choice of forum is ordinarily entitled. S.E. C. v. Capt. Crab, Inc., 655 F. Supp. 615, 617 n. 1 (S.D.N.Y. 1986). But see S.E.C. v. Thrasher, No. 92 Civ. 6987 (JFK), 1993 WL 37044, at *3 (S.D.N.Y. Feb. 8, 1993) (defendant has substantial burden to overcome the SEC's choice of forum). Even where there is related litigation in another district, the decision to transfer lies within the broad discretion of the district court and is to be made based upon case-specific notions of convenience and fairness. In re Cuyahoga Equip. Corp., 980 F.2d at 116-17.

There is no dispute that the SEC could have filed this action in the District of Connecticut. Since the jurisdiction of the transferee court is not at issue, what is at stake is whether for reasons of convenience or fairness the case should be transferred to the District of Connecticut.

The starting point for the analysis is the weight to be accorded plaintiff's choice of forum, an issue that is hotly contested by the parties. Ordinarily, courts should defer to a plaintiff's choice of forum. Nonetheless, a plaintiff's choice of forum is entitled to substantially less deference when the forum is "neither the plaintiff's home nor the place where the operative facts of the action occurred." Hall, 89 F. Supp.2d at 494 (citation omitted). In the context of the related doctrine of forum non conveniens, the Second Circuit has explained that "[t]he more it appears that a . . . plaintiff's choice of forum has been dictated by reasons that the law recognizes as valid, the greater the deference that will be given to the plaintiff's forum choice." Irragori v. United Tech. Corp., 274 F.3d 65, 71-72 (2d Cir. 2001). For example, when a plaintiff chooses its home forum, that choice is given greater deference "because it is presumed to be convenient." Id. at 71. Consequently, the more that it appears that the choice was driven by reasons of convenience, the greater the deference that will be accorded the plaintiff's choice. Id. at 71-72. On the other hand, where the "operative facts upon which the litigation is brought bear little material connection to the chosen forum," Ocean Walk Mall, 2001 WL 640847, at *1, or where the choice of forum otherwise appears to be motivated by forum shopping, Irragori, 274 F.3d at 72, the plaintiff's choice will command less deference.

The parties dispute whether the plaintiff's choice of forum was motivated by forum shopping or by convenience. The defendants urge that the plaintiff's choice of forum is entitled to little deference because the locus of the operative facts is Stamford, not New York City. The plaintiff disputes this characterization of the operative facts, and argues that its choice was due to considerations of convenience.

The plaintiff has shown that its choice of forum was dictated by convenience, principally the presence of an SEC office in New York, and its choice is therefore entitled to substantial deference. Moreover, to the extent that the "operative facts" test is a tool for measuring the legitimacy of the plaintiff's choice of forum, then it is helpful to focus on the precise issues that are at stake in this lawsuit. See Irragori, 274 F.3d at 74. Since Xerox is headquartered in Stamford, Stamford-based activities, including much of the work done in connection with the audits, will be extremely important to this lawsuit. It is also true, however, that events important to the claims in the Complaint are described as having occurred in New York. Moreover, defendants critical to this lawsuit are and were located in and working from New York on the Xerox account, specifically, KPMG, Conway and Boyle. It is simply not accurate to assert, as the defendants do, that this litigation has "little material connection" to New York. The operative facts are not so confined to Connecticut that they diminish the deference due to plaintiff's choice of forum.

It is also important to note that through this lawsuit, and in particular its demand for injunctive relief, the SEC seeks to address the standards and procedures under which the entirety of KPMG will operate in the future, as well as the course of conduct that governed KPMG's performance in the Xerox audits. In the event that defendants are found liable, whether injunctive relief will be entered will be determined in part by reference to KPMG policies and procedures that transcend its work on any one client's audits. Since an injunction against future securities violations has "grave consequences," S.E.C. v. Unifund Sal, 910 F.2d 1028, 1040 (2d Cir. 1990), to obtain a permanent injunction the SEC will have to show not only that there has been a violation of the securities laws, but also that there is a risk of repetition. S.E.C. v. Commonwealth Chem. Sec., 574 F.2d 90, 99-100 (2d Cir. 1978); see also S.E.C. v. Batterman, No. 00 Civ. 4835 (LAP), 2002 WL 31190171, at *9 (S.D.N.Y. Sept. 30, 2002); S.E.C. v. Falbo, 14 F. Supp.2d 508, 529 (S.D.N.Y. 1998). An injunction "is appropriate where there is a likelihood that, unless enjoined, the violations will continue." S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1477 (2d Cir. 1996) (citation omitted). Since both KPMG's past and future practices are at issue, the SEC's decision to bring its lawsuit in the district in which KPMG is headquartered is entirely consistent with the nature of the suit and the purposes of the SEC enforcement action and is entitled to substantial deference.

The defendants have not shown that the weight of the other factors relevant to this transfer motion overcomes the deference properly accorded to the plaintiff's choice of forum. They have not shown, for instance, that it would be more convenient to litigate this action in Hartford rather than New York. Litigation in Manhattan will likely be more convenient for more witnesses than litigation in Hartford. Two of the defendants reside in Connecticut, specifically, in Westport and Darien, but work in New York and Texas. The other two individual defendants reside in New York City and Pennsylvania. KPMG's headquarters is in New York City. Voluminous documents that have already been gathered are in neither New York nor Connecticut; other documents may have to be obtained from Connecticut and New York, as well as other locations. The availability of process to compel attendance of unwilling witnesses gives New York an advantage, albeit not a substantial one. There is no showing that it would be a financial burden on any defendant to litigate in New York as opposed to Hartford. To the contrary, counsel for the defendants are largely from New York City; none are from Connecticut. The SEC has a large office in New York and none in Connecticut, making it substantially more difficult for it to litigate in Connecticut. In fact, even when it filed its complaint against Xerox in 2002, the SEC filed in the Southern District of New York, rather than in Connecticut, where Xerox has its headquarters. Both fora can be assumed to be familiar with the governing law. In sum, the SEC has shown that it would be far more convenient for it to litigate this action in the Southern District of New York rather than in Connecticut.

The most significant reason to transfer this case to Connecticut is to allow it to be litigated before the able judge who is already presiding over the Connecticut Actions. Issues of efficiency and the interest of justice, based on the totality of the circumstances, must always be carefully weighed. The defendants stress that a federal judge is already presiding over substantial, complex litigation arising from the very same events that are at the heart of this case. They urge the economies that would arise from a transfer, since one judge has already had to make a substantial investment in the issues surrounding the Xerox audits.

The SEC points out that none of the Connecticut Actions that arise from the events at issue in the Complaint have moved beyond the pleading stage, despite their pendency for many months or years. The SEC also points out that, while most of the litigation in Connecticut arises from the same or similar underlying facts, the conduct of the litigation will be substantially different. None of the individual defendants in this action is a named defendant in the Connecticut Actions. And, since the securities laws impose in some important respects greater burdens on private plaintiffs than on the SEC, the difference in plaintiffs will have a noticeable effect on the course of the litigation. In addition, the court presiding over the SEC action will not be faced with a motion to certify a class. A substantial investigation has already been undertaken in the SEC case and can be expected to have a dramatic impact on the conduct of discovery in its case. There will be no consolidation of this case and the Connecticut Actions for discovery or any other purpose. See 15 U.S.C. § 78u(g). As the defendants acknowledge, their motion cannot be premised on any claim that a transfer will result in efficiencies to be derived from coordinated or consolidated discovery. The SEC's mission and the relief it seeks in this action also suggest that it should be litigated on a track appropriate to this litigation, which may be different from that appropriate to the related private litigation.

On balance, the defendants have not shown that this action should be transferred to Connecticut. The SEC is entitled to litigate this case in its chosen forum unless the defendants can show that the relevant factors sufficiently favor a transfer. Here, the weight of the relevant factors is also in favor of litigating this case in this district.

SO ORDERED:


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