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United States Securities and Exchange Commission v. Kearns

July 14, 2009


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


Plaintiff United States Securities and Exchange Commission ("SEC") has brought suit alleging that two individual defendants participated in a fraudulent billing scheme to improve the financial performance of MedQuist, Inc. ("MedQuist"), a medical transcription company based in New Jersey.*fn1 Defendants, who live in New Jersey and who worked at MedQuist's New Jersey headquarters, have moved to transfer this action to the United States District Court for the District of New Jersey (Camden Division). For the following reasons, the motion is granted.


As alleged in the SEC's complaint, from 1999 to 2004 MedQuist inflated its bills to customers by increasing the number of lines it claimed to have transcribed. Knowing that customers were unable to verify line counts on bills, MedQuist secretly manipulated the line counts on bills to achieve specific revenue and margin targets. MedQuist established internal billing policies regarding this scheme, including internal ratios for manipulating the billing and achieving certain revenue targets.

Defendants Kearns and Van Fossen knew of the scheme and took steps to further and conceal it. The defendants misled MedQuist's independent auditors into believing that MedQuist was actually counting the lines as required by customer contracts. Defendants also told the auditors they knew of no allegations of fraud or problems when they knew of, inter alia, customer and employee complaints of overbilling and line count manipulation. The defendants misled shareholders and the public in SEC filings, press releases, and earnings calls by not disclosing the overbilling scheme and by stating that MedQuist's revenues were based upon the contracted rates and increased sales. The SEC states in its brief opposing transfer that upon information and belief, these SEC filings and press releases were received by investors and analysts in New York, and the earning calls often included New York participants. The SEC also notes that some of MedQuist's customers did business in New York. MedQuist's stock was publicly sold on the New York City-based NASDAQ stock exchange.

MedQuist's headquarters are in Mount Laurel, New Jersey, which is approximately 85 miles from New York City and 15 miles from the Camden, New Jersey courthouse where defendants seek to transfer this action. The SEC has a regional office in New York; it also has a regional office in Philadelphia, Pennsylvania that is approximately 2.5 miles from the Camden courthouse. Both defendants reside in New Jersey, approximately ten miles from the Camden courthouse. Defendant Kearns was the Treasurer and Chief Financial Officer of MedQuist from 2000 to 2004, and defendant Van Fossen was Vice President and Controller of MedQuist from 1995 to 2005. Defendants state that senior management work in MedQuist's Mount Laurel corporate headquarters, and that Van Fossen is still an employee there. Defendants also note that MedQuist's independent auditors worked out of their Philadelphia offices.

The Honorable Jerome B. Simandle of the United States District Court for the District of New Jersey (Camden Division) has presided over at least five actions related to MedQuist's billing practices. Those actions include a settled customer class action, a settled shareholder class action, a settled transcriptionist's class action, and a dismissed derivative action. These four concluded matters produced over 200 pages of written opinions by Judge Simandle. The one action still pending before Judge Simandle is a customer action asserting claims of fraud and breach of contract arising out of the billing scheme described in the SEC's complaint in this case.

Counsel for the SEC in this action are based in Washington, DC. Counsel for the defendants are based principally in Washington, DC and New York.


The standard for a motion to transfer venue pursuant to 28 U.S.C. § 1404(a) is well established. Section 1404 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." 28 U.S.C. § 1404(a). A 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." D.H. Blair & Co., Inc. v. Gottdiener, 462 F.3d 95, 106 (2d Cir. 2006); see also Azari v. B & H Photo Video, 06 Civ. 7825(DLC), 2007 WL 13101, at *1-2 (S.D.N.Y. Jan. 3, 2007). The movant bears the burden of establishing that transfer is warranted. Azari, 2007 WL 13101, at *1. If the transferee court also has jurisdiction over the case, the court must determine whether, considering the "convenience of parties and witnesses" and the "interest of justice," a transfer is appropriate. Id. The factors a court considers in making that determination include (1) the plaintiff's choice of forum, (2) the convenience of witnesses, (3) the location of relevant documents and relative ease of access to sources of proof, (4) the convenience of parties, (5) the locus of operative facts, (6) the availability of process to compel the attendance of unwilling witnesses, [and] (7) the relative means of the parties.

D.H. Blair, 462 F.3d at 106-07 (citation omitted). A court may also consider "the forum's familiarity with the governing law," and "trial efficiency and the interest of justice, based on the totality of the circumstances." Berman v. Informix Corp., 30 F. Supp. 2d 653, 657 (S.D.N.Y. 1998). 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. SEC v. KPMG, LLP, No. 03 Civ. 671(DLC), 2003 WL 1842871, at *3 (S.D.N.Y. Apr. 3, 2003).

The SEC's choice of forum is entitled to the level of deference to which a plaintiff's choice of forum is ordinarily entitled. Id. Ordinarily, courts are to defer to a plaintiff's choice of forum. Id.; see also Berman, 30 F. Supp. 2d at 656 (plaintiff's choice of forum should not be disturbed "unless the defendants make a clear and convincing showing that the balance of convenience favors defendants' choice" (citation omitted)). Where, however, "the operative facts upon which the litigation is brought bear little material connection to the chosen forum, or where the choice of forum otherwise appears to be motivated by forum shopping, the plaintiff's choice will command less deference." KMPG, 2003 WL 1842871, at *3 (citation omitted) (adopting standard from forum non conveniens precedent). All parties acknowledge that "where there is no material connection between this district and the operative facts[,] the interests of justice require the transfer of the action." Cohn v. Metropolitan Life Ins., Co., No. 07 Civ. 0928(HB), 2007 WL 1573874, at *3 (S.D.N.Y. May 31, 2007) (citation omitted).

At the outset, neither party disputes that this case could have been brought in the District of New Jersey; rather, the parties' principal dispute is over what level of deference to accord to the SEC's choice of forum. In this case, the operative facts occurred in New Jersey, not in New York, and as such, the SEC's choice of forum should be accorded less deference.

The only operative fact mentioned in the SEC's complaint that took place in this district was that MedQuist's shares were traded on the NASDAQ. That fact alone, however, hardly demonstrates that the operative facts that are central to this complaint took place in this forum. If trading on a New York-based stock exchange were enough by itself to avoid transfer of venue to other districts, it would be ...

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