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In re Adelphia Communications Corp. Securities and Derivative Litigation

August 31, 2010

IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION


The opinion of the court was delivered by: McKENNA, D.J.

MEMORANDUM AND ORDER

1.

This action -- C. Philip Rainwater v. Deloitte & Touche LLP (04 Civ. 3961) -- was filed in the United States District Court for the Eastern District of Virginia, and transferred to this district for inclusion in the above-identified multidistrict litigation.*fn1

Adelphia Communications Corporation ("Adelphia") was a provider of cable television. In March of 2001, plaintiff and other shareholders of Benchmark Media, Inc. ("BMI"), which owned and operated cable televsion systems, sold their respective interests in BMI to Adelphia for a total purchase price of $220 million, $115 million in cash (to be used to pay liabilities of BMI) and $105 million in Adelphia stock; plaintiff received 695,307 shares of Adelphia (Am. Compl. ¶ 8), worth about $45 per share in March of 2001 (id. ¶ 11), and just about worthless by the spring and early summer of 2002. (Id. ¶ 17.) Adelphia and its affiliates filed for bankruptcy in June of 2002. (Id. ¶ 18.)

Plaintiff alleges that he received from Adelphia, and relied on in entering into the March 2001 transaction, Adelphia's quarterly reports on Securities and Exchange Commission ("SEC") Form 10-Q for the quarters ended March 31, June 30 and September 30, 2000, its annual report on Form 10-K for the year ended December 31, 1999 (as amended by Form 10-K/A-2), and its Prospectus dated May 14, 1999 and Prospectus Supplement thereto dated January 17, 2001. (Am. Compl. ¶¶ 9-10.)

Plaintiff alleges that: In its capacity as the independent auditor for Adelphia, Deloitte issued an opinion on the financial statements of Adelphia at and for the year ended December 31, 1999. In its opinion on those financial statements, Deloitte said the following: (1) that Deloitte had conducted an audit of the financial statements in accordance with GAAS; (2) that Deloitte had planned and performed that audit to obtain reasonable assurance about whether the financial statements were free of material misstatements; (3) that, in Deloitte's opinion, the financial statements presented fairly, in all material respects, the financial position of Adelphia as of the dates of those financial statements and the results of operations and cash flows of Adelphia for the periods covered by such financial statements in conformity with GAAP; (4) that, in Deloitte's opinion, the financial statement schedules included with such financial statements, when considered in relation to the financial statements taken as a whole, present fairly in all material respects the information set forth therein and (5) that Deloitte's audit provided a reasonable basis for its opinion.

(Pl. Mem. at 7 (citing Am. Compl. ¶ 72).) "Each of the foregoing statements," plaintiff alleges, "constituted a knowing or reckless misrepresentation by Deloitte of a material fact." (Id. (citing Am. Compl. ¶¶ 72, 73 & 74).)

The amended complaint asserts five claims: (i) Count One, for violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; (ii) Count Two, for violation of Section 18 of the Securities Exchange Act of 1934, 15 U.S.C. § 78r; (iii) Count Three, for common law fraud; (iv) Count Four, for constructive fraud; and (v) Count Five, for aiding and abetting fraud or constructive fraud.

2.

Deloitte & Touche LLP ("Deloitte"), Adelphia's auditor at the times relevant to the amended complaint, moves pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) for dismissal of the amended complaint.

On a motion under Fed. R. Civ. P. 12(b)(6), a court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor; the court may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit. To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient "to raise a right to relief above the speculative level."

ATSI Commc'ns, Inc. v. The Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, (2007) (footnote omitted) (other citation omitted)). Pursuant to Fed. R. Civ. P. 9(b), "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally."

3.

Plaintiff's first claim alleges the violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. (Am. Compl. ¶ 69.) "To state a claim under § 10(b) and Rule 10b-5, plaintiffs must allege that [the 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.'" Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d Cir. 2007) (quoting In re ...


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