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SECURITIES AND EXCHANGE COMMISSION v. KPMG

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 ...


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