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In re Bisys Securities Litigation

October 28, 2005


The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.

This document relates to: All Actions.


On May 17, 2004, The BISYS Group, Inc. ("BISYS" or the "Company") announced plans to restate its financial results for fiscal years 2001, 2002, and 2003 and its interim results for fiscal year 2004. *fn1 Plaintiffs then brought this putative class action against BISYS, seven of its current and former officers and directors (collectively, the "Individual Defendants"), *fn2 and its independent auditor, PricewaterhouseCoopers LLP ("PwC"). Plaintiffs seek recovery against all defendants under Sections 10(b) of the Securities Exchange Act of 1934 *fn3 (the "Exchange Act") and Rule 10b-5 thereunder. *fn4 They assert an additional claim against the Individual Defendants under Section 20(a) of the Exchange Act. *fn5 The case is before the Court on motions by BISYS, the Individual Defendants, and PwC to dismiss plaintiffs' Consolidated Amended Complaint ("Complaint").

I. Facts

The Co-Lead Plaintiffs in this action are the Public Employees Retirement Association of New Mexico, the State of New Mexico Educational Retirement Board, and the New Mexico State Investment Council. They purport to represent a class of all individuals and entities who purchased BISYS securities between October 23, 2000 and May 17, 2004 (the "Class Period").

BISYS is a Delaware corporation that provides outsourcing services to financial institutions and other corporations. It operates through three separate business groups: BISYS Insurance and Education Services, BISYS Investment Services, and BISYS Information Services. *fn6 This action and the accounting restatement it is based upon relate only to the first of these three groups, BISYS Insurance and Education Services (the "Insurance Services Group"), which, among other things, distributes life insurance and commercial property/casualty insurance products issued by various insurance companies. *fn7

According to plaintiffs, problems in the Insurance Services Group began to emerge in September and October 2003, when the Company announced that chief executive officer Dennis Sheehan and chief financial officer Andrew Corbin were resigning and that earnings for the current fiscal period would be twenty to thirty percent lower than the Company had predicted previously. BISYS attributed the reduction to shortfalls in the Insurance Services Group. *fn8 The following April, BISYS announced the resignation of Jose Suquet, president of the Insurance Services Group. *fn9 Two weeks later, on April 22, 2004, BISYS revealed that it would take a one-time $24.7 million charge in order to counterbalance past revenues that had been recognized prematurely as commissions receivable in the Insurance Services Group. *fn10 Then, on May 17, 2004, BISYS announced that it planned to increase the $24.7 million charge to approximately $70 to $80 million and that this change would require the Company to restate its financial results for the fiscal years ending June 30, 2001, 2002, and 2003 and the interim financial results for fiscal year 2004. *fn11 In the press release, James Fox, who then was BISYS' executive vice president and chief financial officer explained,

"[the] adjustment to commissions receivable in our Life Insurance division is larger than we had previously anticipated, and after further analysis requires that we restate our previously reported results to appropriately reflect the impact of the adjustment on prior periods." *fn12

On June 16, 2004, BISYS issued its Form 10-Q for the quarter ending March 31, 2004, which disclosed that the restatement of commissions receivable announced on May 17, 2004 would total $80 million and that the Company would make a further adjustments of approximately $21 million. In a press release issued the same day, BISYS announced that the restatement had put it in breach of its financial covenants with lenders and had sparked an investigation by the SEC. *fn13

Ultimately, BISYS' restatement included more than $100 million of adjustments. *fn14 Its after tax effect was to reduce BISYS' originally reported net income for fiscal years 2001, 2002, and 2003 from $312.8 million to $254 million, or $58.8 million. Put another way, the net income that BISYS reported during those three years had been overstated by approximately 23 percent. *fn15

The restatement was intended to correct three main accounting problems. First, during the years at issue, BISYS improperly had reported revenue stemming from certain insurance sales commissions in the Insurance Services Group's Life Insurance Division before the revenue actually was realized. This premature recognition of commissions receivable revenues resulted in approximately 77 percent of the restatement, or about $80 million. *fn16 Second, BISYS had accounted improperly for goodwill and deferred taxes in companies recently acquired by the Insurance Services Group's Life Insurance Division. For example, BISYS recorded revenues that had been earned by companies it acquired prior to the acquisitions as revenues of BISYS rather than as accounts receivable as of the dates of the acquisition. Roughly twenty percent of the restatement, approximately $21 million, was intended to correct this problem. *fn17 Finally, BISYS had accounted improperly for agent commissions payable in the Life Insurance Division, which resulted in the remaining three percent of the restatement, or about $2.6 million. *fn18

Plaintiffs now allege that BISYS, the Individual Defendants, and PwC intentionally or recklessly misrepresented BISYS' original financial results in order to inflate the Company's share price. *fn19 This artificial inflation, plaintiffs claim, permitted BISYS to secure favorable credit terms and to use its overpriced stock as consideration in the acquisition a number of other companies during the Class Period. It further enabled the Individual Defendants to sell personally owned BISYS shares at high prices for proceeds of more than $60 million. *fn20 According to plaintiffs, the Individual Defendants were motivated also by the desire to increase the sizes of their compensation packages, which depended, at least in part, on the performance of their business sector. *fn21

II. Pleading Standards

In deciding a Rule 12(b)(6) motion, the Court accepts as true the well-pleaded allegations in the complaint and draws all reasonable inferences in the plaintiffs' favor. *fn22 Dismissal is inappropriate "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." *fn23

III. Plaintiffs' Section 10(b) Claims

A. Pleading Requirements

Section 10(b) makes it unlawful "for any person, directly or indirectly ... [t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Rule 10b-5 in turn provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

"(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." *fn24

To state a claim based on a misrepresentation or omission in violation of Rule 10b-5, as plaintiffs purport to do here, one must allege that a defendant "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." *fn25

These allegations must satisfy Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act ("PSLRA"), which require that a plaintiff specify the statements that the plaintiff contends were fraudulent, identify the speaker, state where and when the statements were made, and explain why the statements were fraudulent. *fn26 Further, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." *fn27 The required state of mind is "an intent to deceive, manipulate, or defraud." *fn28 Finally, if an allegation is based on information and belief, "the complaint shall state with particularity all facts on which that belief is formed." *fn29

B. Alleged Misstatements

The Complaint quotes from nearly every public filing and press release issued by BISYS during the Class Period and asserts that the restatement is an admission that these filings and press releases misrepresented BISYS' true financial condition. BISYS argues that these allegations are not sufficiently particularized because plaintiffs fail to specify which figures in the financial statements were false and to explain why those figures were misleading.

BISYS' argument, for the most part, is without merit. Pursuant to Generally Accepted Accounting Principles ("GAAP"), previously issued financial statements should be restated only to correct material accounting errors that existed at the time the statements were issued. *fn30 As another court in this district has explained, "[a]lthough a restatement is not an admission of wrongdoing, the mere fact that financial results were restated is sufficient basis for pleading that those statements were false and misleading." *fn31 The Complaint therefore alleges adequately that the financial statements and press releases issued during the Class Period were false to the extent they reported, discussed, or analyzed figures that subsequently were restated as well as any financial statistics derived from restated figures. This, however, is not a complete answer to this aspect of the motion.

As BISYS points out, a number of the alleged statements quoted in the Complaint, especially those taken from BISYS press releases, do not relate to the financial figures that BISYS restated or to the business group from which the restated financials originated. For example, plaintiffs quote from press releases discussing the impact on the Company's business of the September 11 terrorist attacks, the growth in the Company's Investment Services Group, a new stock buy-back program authorized by BISYS' Board of Directors, and the fact that a number of new clients recently had purchased the Company's bank outsourcing services. *fn32 Plaintiffs have alleged no facts indicating that these statements--or any others that do not relate to the restated financials--were false or misleading. Accordingly, to the extent that plaintiffs cite statements by defendants that do not report, relate to, or discuss aspects of the financials that subsequently were restated, they have not alleged falsity with the particularity required by Rule 9(b) and the PSLRA.

C. The Group Pleading Doctrine

Although plaintiffs assert that several of the Individual Defendants signed allegedly misleading financial reports and personally made statements that were relayed to the public through BISYS press releases, they make no such allegations with respect to other Individual Defendants. Instead, they rely on the group pleading doctrine, asserting that "[i]t is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the Company's filings, press releases and other publications ... are the collective actions of [all of the Individual Defendants]." *fn33

The group pleading doctrine developed in consequence of the rigors of Rule 9(b), which requires that averments of fraud be made with particularity. Recognizing that plaintiffs charging fraud with respect to corporate utterances seldom have access, prior to the commencement of discovery, to information permitting identification of the particular officers, directors and employees who bear personal responsibility for the utterances in question, courts developed the doctrine to permit plaintiffs, for pleading purposes only, to

"rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company. This allows plaintiffs, to a limited extent, to circumvent the general pleading rule that fraudulent statements must be linked directly to the party accused of the fraudulent intent." *fn34

BISYS and the Individual Defendants argue that the group pleading doctrine has been abrogated by the enactment of the PSLRA. They rely principally on Southland Securities Corp. v. INSpire Insurance Solutions Inc., *fn35 in which the Fifth Circuit held that the group pleading doctrine "cannot withstand the PSLRA's specific requirement that the untrue statements or omissions be set forth with particularity as to 'the defendant' and that scienter be pleaded with regard to 'each act or omission' sufficient to give 'rise to a strong inference that the defendant acted with the required state of mind.' " *fn36

1. The Effect of the PSLRA

With respect to the Fifth Circuit and my colleagues, I find defendants' contention unpersuasive. Congress enacted the PSLRA in 1995 to deter strike suits based on meritless allegations of securities fraud. *fn37 To this end, it imposed mandatory discovery stays on securities actions filed in federal court and established uniform, stringent pleading requirements in such cases. *fn38 But nothing in the statutory text or, for that matter, its legislative history addresses the group pleading doctrine, *fn39 which was an established feature of federal securities law well before enactment of the PSLRA. *fn40 Proper respect for Congress cautions against imputing to it an intention to change the law in such circumstances. *fn41 Indeed, although defendants cite a handful of ...

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