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380544 Canada, Inc., Wayne Sim v. Aspen Technology

September 14, 2011

380544 CANADA, INC., WAYNE SIM, AND SALVADOR CLAVE, PLAINTIFFS,
v.
ASPEN TECHNOLOGY, INC., DAVID L. MCQUILLIN, LAWRENCE B. EVANS, AND LISA ZAPPALA, DEFENDANTS.



The opinion of the court was delivered by: John F. Keenan, United States District Judge

Opinion and Order

Before the Court is 380544 Canada, Inc., Wayne Sim, and Salvatore Clave's (collectively, the "Plaintiffs") motion to amend the complaint to include additional facts amplifying federal securities fraud, common law fraud, and breach of contract claims against corporate Defendant Aspen Technology, Inc. ("Aspen Tech") and three former high-ranking officers of Aspen Tech, David McQuillin, Lawrence Evans, and Lisa Zappala (collectively, the "Individual Defendants"). Plaintiffs also seek to assert a new claim against all Defendants under the Massachusetts Uniform Securities Act. For the reasons that follow, the motion is denied.

I.Background

Wayne Sim and Salvador Clave were respectively the Chief Executive Officer and Chief Operating Officer of a process engineering software company called Hyprotech. In 2001, Defendant Aspen Tech began negotiations to acquire Hyprotech; in order to finance this acquisition, Aspen Tech recruited investors, including Sim and Clave, to purchase approximately $50 million of stock via a private placement. On May 9, 2002, Sim and Clave entered into a private placement Securities Purchase Agreement (the "SPA") for the purchase of approximately $6.8 million of Aspen Tech shares. After the execution of the SPA, both Sim and Clave took sales management positions at Aspen Tech -- Sim served as the Senior Vice President of Sales, and Clave served as the Senior Vice President of Sales Operations. About three years after Sim and Clave's stock purchase, Aspen Tech revealed that it had improperly accounted for revenue from numerous software licensing and service agreements and, as a result, the company restated its financials for fiscal years 1999 through 2004.

Plaintiffs filed their initial complaint on February 15, 2007 asserting claims for, among other things, violation of Section 10(b) and Section 20(a) of the Securities and Exchange Act of 1934 and common law fraud. Plaintiffs premised these claims on allegedly false statements regarding the company's revenues and accounting practices that Aspen Tech and the Individual Defendants made in (1) private meetings with the Plaintiffs, (2) the SPA itself, (3) press releases, and (4) SEC filings that reported and commented on Aspen Tech's financial results in the thirteen fiscal quarters preceding the execution of the SPA. Plaintiffs contend that but for these false representations, they would not have entered into the SPA.

Defendant Aspen Tech answered the complaint on April 17, 2007. At the initial conference on May 14, 2007, the Individual Defendants informed the Court of their intent to file pre-answer motions to dismiss the complaint and submitted a stipulated briefing schedule for approval. These motions to dismiss triggered a discovery stay under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b)(3)(B). In an Opinion and Order dated March 18, 2008, the Court granted the Individual Defendants' motions to dismiss in part, and directed Plaintiffs "to advise the Court by April 11, 2008, as to whether they intend to file an amended complaint. If so, the parties are directed to meet and confer regarding a schedule for the filing of an amended complaint and subsequent motions to dismiss, and submit a stipulated [briefing] schedule." 380544 Canada, Inc. v. Aspen Tech., Inc., 544 F. Supp. 2d 199, 236 (S.D.N.Y. 2008). In accordance with the terms of a Stipulation and Order dated April 30, 2008, Plaintiffs filed an amended complaint on May 2, 2008. See Stipulation and Order, 380544 Canada, Inc. v. Aspen Technology, Inc., No. 07 Civ. 1204 (S.D.N.Y. Apr. 30, 2008), ECF No. 77. Only Defendant Evans moved to dismiss the amended complaint. In an Opinion and Order dated May 5, 2009, the Court again granted the motion to dismiss in part, and dismissed some claims against Evans with prejudice. See 380544 Canada, Inc. v. Aspen Tech., Inc., 633 F. Supp. 2d 15, 37 (S.D.N.Y. 2009) ("The Court's opinion dismissing the initial complaint notified Plaintiffs that they failed to plead certain claims with the requisite particularity and that they failed to raise a strong inference of Evans's scienter. Despite this notice, in their amended complaint, Plaintiffs again fail to plead certain claims with the requisite particularity and again fail to raise a strong inference of Evans's scienter . . . . This demonstrates that permitting Plaintiffs to replead would be futile.").

At this point the PSLRA stay lifted, and on June 22, 2009, the Court entered a stipulated scheduling order for discovery. See Stipulation, 380544 Canada, Inc. v. Aspen Technology, Inc., No. 07 Civ. 1204 (S.D.N.Y. June 22, 2009), ECF No. 99. The discovery deadline was subsequently extended three times, with fact discovery ultimately closing on September 1, 2010. See Order, 380544 Canada, Inc. v. Aspen Technology, Inc., No. 07 Civ. 1204 (S.D.N.Y. June 8, 2010), ECF No. 119. On September 13, 2010, Plaintiffs moved for leave to file a second amended complaint. Plaintiffs seek to add allegations concerning representations made during private meetings they attended with Aspen Tech executives in 2001 and 2002. Specifically, Plaintiffs now claim that Aspen Tech represented that revenues in its Aspen Engineering Suite ("AES") division had grown steadily through 2001 and were projected to continue to grow by 20% in 2002, but failed to disclose that the growth in revenue was attributable to the acquisition of a company called ICARUS and subsequent accounting manipulation instead of a true increase in sales. (Proposed Second Am. Compl. ¶¶ 34-50). Plaintiffs also propose to add a Massachusetts Uniform Securities Act claim premised on previously pleaded facts. (Id. ¶¶ 349-65).

II.Discussion

A.Legal Standards

Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that after a party has amended a pleading once as of right, future amendments may only be permitted on consent or by leave of court. Although leave to amend should be freely given "when justice so requires," Fed. R. Civ. P. 15(a)(2), the Court retains the discretion to deny leave "for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)); see Local 802, Associated Musicians of Greater N.Y. v. Parker Meridien Hotel, 145 F.3d 85, 89 (2d Cir. 1998) (trial court's discretion to deny motion to amend is "broad"). Delay alone, without an attendant showing of bad faith or prejudice, may be an insufficient basis for denial of a motion to amend. See Ruotolo v. City of N.Y., 514 F.3d 184, 191 (2d Cir. 2008). However, "the longer the period of an unexplained delay, the less will be required of the nonmoving party in terms of a showing of prejudice." Evans v. Syracuse City Sch. Dist., 704 F.2d 44, 47 (2d Cir. 1983) (quotation omitted). Prejudice may result where proposed amendments would: "(i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction." Monahan v. N.Y. City Dep't of Corr., 214 F.3d 275, 284 (2d Cir. 2000) (citing Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993); see AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 626 F.3d 699, 725--26 (2d Cir. 2010).

However, when a party proposes to amend a pleading after the deadline for amendment in a scheduling order, the court must balance Rule 15(a)'s more lenient standard for amendment of pleadings against Rule 16(b)(4)'s mandate that the scheduling order "may be modified only for good cause." See Grochowski v. Phoenix Constr., 318 F.3d 80, 86 (2d Cir. 2003); Parker v. Columbia Pictures Indus., 204 F.3d 326, 340 (2d Cir. 2000) ("[D]espite the lenient standard of Rule 15(a), a district court does not abuse its discretion in denying leave to amend the pleadings after the deadline set in the scheduling order where the moving party has failed to establish good cause."). This balancing enables the Court to ensure both that its scheduling orders have force and that "at some point both the parties and the pleadings will be fixed and the case will proceed." Lincoln v. Potter, 418 F. Supp. 2d 443, 454 (S.D.N.Y. 2006). "Good cause" to justify untimely amendment of pleadings "depends on the diligence of the moving party." Parker, 204 F.3d at 340. Courts have found good cause to excuse a movant's late amendment where new information came to light at such a time that the movant could not reasonably have complied with the scheduling order. See, e.g., Estate of Ratcliffe v. Pradera Realty Co., No. 05 Civ. 10272, 2007 WL 3084977, at *4 (S.D.N.Y. Oct. 19, 2007). On the other hand, where the substance of the proposed amendment was known to the movant prior to the deadline for amending pleadings, but the movant nevertheless failed to act, courts have denied leave to amend under Rule 16. See Volunteer Fire Ass'n of Tappan, Inc. v. Cnty. of Rockland, No. 09 Civ. 4622, 2010 WL 4968247, at *4 (S.D.N.Y. Nov. 24, 2010);

Oppenheimer & Co. Inc. v. Metal Mgmt., Inc., No. 08 Civ. 3697, 2009 WL 2432729, at *3-4 (S.D.N.Y. July 31, 2009); Rent-A-Center, Inc. v. 47 Mamaroneck Ave. Corp., 215 F.R.D. 100, 104 (S.D.N.Y. 2003) (holding that "defendants' failure to comply with the Court's Scheduling Order resulted from a lack of diligence, because the substance of the defendants' 'new' claim was known when the defendants filed their original amended answer and added their counterclaim").

B.Rule 16(b)

This Court's general practice is to enter a case management order during an initial conference. However, at the initial conference in this case, the Individual Defendants informed the Court of the forthcoming pre-answer motions to dismiss. Since discovery was immediately stayed under the PSLRA, entry of a case management order setting deadlines for amendment and discovery proved impractical. Instead, the Court first allowed motion practice to proceed in order to define the plausibility of Plaintiffs' claims, and subsequently entered stipulated scheduling orders dated April 30, 2008 and June 22, 2009 to manage the timing of amendments and discovery. The Court's view, as expressed to counsel in the pre-motion conference, is that those stipulations act as the Rule 16 scheduling order. Plaintiffs contend that the April 30, 2008 order only governs the timing of "an" amendment and does not impose a final deadline for "any" amended pleadings. However, the April 30, 2008 order, particularly when considered in conjunction with the May 5, 2009 opinion denying Plaintiffs further leave to replead, "explicitly limited the plaintiffs' ability to amend their complaint" - the prerequisite for applying Rule 16. In re Wireless Tel. Servs. Antitrust Litig., No. 02 Civ. 2637, 2004 WL 2244502, at *5 & n.6 (S.D.N.Y. Oct. 6, 2004) (invoking Rule 16 where scheduling orders did not specify a deadline for amendment of pleadings but "[t]he Orders themselves, and the conferences which preceded them, left no doubt that the Amended Complaint was the final statement of the ...


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