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In re Polaroid Corp. Securities Litigation

November 13, 2006

IN RE POLAROID CORPORATION SECURITIES LITIGATION


The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge

(and all consolidated cases)

OPINION & ORDER

This dispute arises from the demise of the former instant photography giant, Polaroid Corporation, whose fortunes fell when confronted by the advent of digital photography. Lead plaintiffs, the Constance Sczesny Trust and the Edward R. Sczesny Trust, who bring this consolidated action on behalf of a proposed class of individuals who purchased Polaroid securities during the period March 28, 2000 through August 9, 2001, seek to recover losses they allegedly suffered due to what they characterize as Polaroid's "accounting shenanigans" that were approved by its outside auditor, KPMG LLP. In the Amended Consolidated Class Action Complaint, plaintiffs assert claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated thereunder. Defendants -- KPMG and three former executives of the now defunct Polaroid Corporation -- have moved to dismiss the complaint. Because certain of plaintiffs' claims are barred by the applicable statute of limitations, and because plaintiffs have failed to plead scienter with the requisite particularity as to the remaining claims, defendants' motion is granted.

TABLE OF CONTENTS

I. FACTUAL BACKGROUND...... 2

A. Overview..... 2

B. The Parties..... 3

C. The Alleged Fraud and its Aftermath..... 4

i. Deferred Tax Assets..... 4

ii. Reversal of Restructuring Reserves..... 6

iii. Failure to Issue Going Concern Qualification and Misrepresentations Regarding Refinancing...... 7

a. The 2000 Annual Report..... 7

b. The Quarterly Report for the First Quarter of 2001..... 10

c. Polaroid's Demise and the Current Litigation..... 11

II. DISCUSSION..... 11

A. Legal Standard on Motion to Dismiss..... 11

B. Statute of Limitations..... 12

i. Deferred Tax Assets..... 15

ii. Reversal of Restructuring Reserve..... 17

iii. Failure to Issue Going Concern Qualification and Misrepresentations Regarding Refinancing..... 18

C. Scienter..... 21

i. KPMG ..... 22

ii. Polaroid Executives..... 25

III. CONCLUSION..... 29

I. FACTUAL BACKGROUND

A. Overview

Polaroid had been the foremost instant photography company before competition from digital photography significantly impacted its core business. (Amended Compl. ¶ 1.) Polaroid ultimately found it necessary, in October 2001, to file for bankruptcy protection. (Id. ¶ 101.) The bankruptcy court, acting pursuant to a request from former shareholders, appointed a bankruptcy examiner -- Perry M. Mandarino -- to investigate allegations that Polaroid had undervalued its assets and thus prematurely filed for Chapter 11. (Id.) The examiner issued his report in August 2003 (the "Mandarino Report"), finding no basis for crediting those allegations. Instead, the examiner reported that the company's financial condition had been deteriorating more rapidly than had been reflected in its public disclosure documents in the years immediately preceding the bankruptcy filing. (Id.) That report's disclosure of allegedly inappropriate accounting entries at Polaroid spurred the allegations raised by plaintiffs in this litigation.

B. The Parties

Plaintiffs are a purported class of all persons who purchased Polaroid's publicly traded securities from March 28, 2000 through August 9, 2001 (the "Class Period") and ...


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